US negotiators ‘must back down from some demands to avert China trade war’

To avert a trade war, US Treasury Secretary Steve Mnuchin and other members of President Donald Trump’s economic team will need to back down this week from key demands they have made of their Chinese counterparts and accept market liberalisation as a starting point, US policy experts said. 

Otherwise, they said, soybean farmers, auto manufacturers and retailers such as Walmart will need to brace for a bilateral trade and investment conflict that appears to be breaking out beyond the realm of tariffs. 

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On Wednesday, the eve of Mnuchin’s meeting with Chinese Vice Premier Liu He in Beijing, the US Defence Department banned the sale of products by Chinese telecom equipment makers ZTE and Huawei on American military bases around the world, and Trump is reportedly considering such restrictions in the US. 

“China continues to send clear signals about a willingness to negotiate on contentious issues such as intellectual property rights protection and market access, but not under the threat of tariffs or other sanctions,” Eswar Prasad, a research associate at Washington’s National Bureau of Economic Research and the former head of the International Monetary Fund’s China division, told the South China Morning Post. 

A Chinese government official close to the trade talks said Wednesday that Beijing would not offer concessions on two of Trump’s main areas of concern – the demand for a US$100 billion reduction in a record US$375 billion bilateral trade imbalance, and the “Made in China 2025” plan to support domestic technological development. 

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“Beijing’s rejection of negotiations framed around numerical targets for China’s trade surplus with the US, which stand in sharp contrast to the Trump team’s focus on this issue, heighten the risk of escalating trade hostilities,” said Prasad, who is also a professor of trade policy at Cornell University in Ithaca, New York. 

Although actions against ZTE and Huawei are technically separate from investigations by the US Trade Representative’s Office that triggered Trump’s plan to impose punitive tariffs on Chinese imports, they are related to Washington’s concerns about Chinese cyber espionage and technological breakthroughs that put the US at risk. 

The Trump administration is considering an executive order to stop some sales of Chinese-origin telecommunications equipment in the US, The Wall Street Journal reported on Wednesday, citing people familiar with the matter, a move that would likely target ZTE and Huawei. 

The Journal report followed one in Stars and Stripes, the official newspaper of the US armed forces, that confirmed the ban on sales of Huawei and ZTE cellphones, personal mobile internet modems and related products to members of the military on US bases. 

“Given the security concerns associated with these devices, as expressed by senior US intelligence officials, it was not prudent for the department’s exchange services to continue selling these products to our personnel,” Major Dave Eastburn, a Pentagon spokesman, told Stars and Stripes. 

Donald Trump’s US$50b tariffs target Beijing’s ‘Made in China 2025’ tech strategy

Beyond measures targeting Chinese technology giants – ZTE is already facing a ban on sourcing components from US suppliers – analysts say they doubt Mnuchin and his team will be able to convince Beijing to reduce the bilateral trade deficit. 

The march toward a bilateral trade war was triggered by Beijing’s long-standing policies that require US and other foreign firms wishing to do business in China to transfer proprietary technology and other forms of intellectual property to domestic firms as a precondition. 

These policies, along with Made in China 2025, have caused concern among US lawmakers that China is using technologies originally developed in the US to undermine American security.

There is legislation in both houses of Congress that proposes further restrictions on US investments by Chinese companies and would give a federal inter-department review panel, the Committee on Foreign Investment in the United States, more power to block acquisitions.

In the coming trade talks, Liu is more likely to offer “several liberalising steps lowering tariffs, reducing ownership caps in finance, etc” than what Mnuchin is looking for in terms of balanced trade and changes in the Made in China 2025 plan, Nicholas Lardy, a senior fellow at the Washington-based Peterson Institute for International Economics, said in an email. 

The possibility of those liberalising steps materialising “is not a view I hold with great confidence”, Lardy said.

The US Treasury and Commerce departments and the US Trade Representative's office didn't immediately respond to requests for comment. 

Mnuchin and his delegation might find enough in the way of concessions on market access, which top Chinese leaders, including President Xi Jinping and Central Bank Governor Yi Gang, have been pledging for months, to at least keep negotiations going beyond this week’s trip. 

“There's plenty the US can ask for on market liberalisation, whether it’s reducing the tariffs imposed on a number of goods or investment restrictions highlighted by China's investment negative list,” said Riley Walters, a policy analyst at the Heritage Foundation, a Washington-based think tank.

“There is also the concern over IP protection, where the US side will surely look for some form of commitment. 

“The White House is sending their entire trade team, including those who'd like to make a deal and those who want to punish China for what they see as years of a one-sided trade relationship,” he added. “So the US delegation will likely be prepared for whatever the Chinese side may offer.” 

Others are less hopeful that Mnuchin will be able to pronounce the meetings a success. 

“On preparation, my guess is that the Chinese side will be much better prepared than ours, in part because they will have mastered the record of US-China trade negotiations. I cannot rule out the possibility of a trade war,” Richard Bush, director of the Brookings Institution’s Centre for East Asia Policy Studies, told the Post. 

He added: “Both China and the Trump administration engage in brinksmanship, so falling off the cliff is not out of the question.”

Additional reporting by Zhenhua Lu.