Commentary / World

U.S. and China recalibrating in their trade talks

by Paul Goldstein

U.S. President Donald Trump’s unconventional bilateral approach has a multilateral impact. His administration is simultaneously engaged in various key bilateral negotiations, which impact each other due to interrelated geopolitical dynamics. Developments in one sphere can influence others and alter U.S. strategic leverage. For example, if a U.S.-China trade deal can be concluded, greater cooperation on North Korea would be possible. The purpose of this emerging “unconventional multilateralism” is to challenge China’s neocolonial approach.

By raising tariffs on $200 billion of Chinese goods, Trump changed the dynamics of the U.S.-China trade negotiations. China’s retaliation on imports from the United States also illustrates the shift in direction. But it is important to recognize that this does not mean a deal is impossible, or even unlikely.

After U.S. Trade Representative Robert Lighthizer’s last meeting with Chinese Vice Premier Liu He on May 10, there will be seven weeks until the next scheduled U.S.-China meeting, which will occur between Trump and Xi on the sidelines of the Group of 20 summit in Osaka. However, both the U.S. and China have recently stated that Lighthizer may go to Beijing before then.

Both sides are recalibrating and sending signals that can either add to or subtract from the talks. The U.S. and China are in the final phase of the negotiations. Regardless of how the trade talks are concluded, the implications of a deal — or a breakdown in talks — will reverberate throughout the region, impacting U.S. diplomacy in other spheres, as well as world markets and global prosperity.

China’s shifting tactics

Trump’s walkout from the Hanoi summit with North Korean leader Kim Jong Un on Feb. 28 surprised the Chinese, who had underestimated his unpredictability. In March, Xi criticized the security services and government-affiliated think tanks for their failure to provide a competent reading of the U.S. president, an accurate assessment of Trump’s approach to U.S.-China relations, or to predict that Trump would follow through on his tariff threats.

China has shifted tactics three times during the talks on the crucial issue of a Trump-Xi summit, and is again adjusting their approach as both sides enter the recalibration period:

1. Pre-Hanoi: China’s approach was to have a Trump-Xi meeting at Mar-a-Lago to finalize the agreement.

2. Post-Hanoi: Xi shifted away from the Mar-a-Lago idea, fearing Trump might walk out. Around this time, a Pacific Tech Bridge executive in Beijing noted the Chinese were off balance.

3. Recent talks: China shifted back to the first option of finalizing the deal with Trump at a summit.

The Chinese had agreed to pass new legislation to enforce the trade deal. After China stated that it seeks to enforce it through regulatory changes, rather than new laws, Trump and Lighthizer viewed the move as backtracking from their commitments. Lighthizer convinced the president that China changed tactics after reneging on enforcement conditions, and as a result, Trump raised tariffs.

Although China’s two annual congresses — the National People’s Congress and Chinese People’s Political Consultative Conference — passed new laws, the U.S. wants additional laws specifying trade deal enforcement, repatriation of money held by U.S. companies in China, domestically stored data access and U.S. ownership of companies. The overall issue is verifying both the binding and non-binding components of a potential agreement. Permanency is necessary for any trade agreement with China, and regulatory reforms are not legally binding.

The U.S. is skeptical of China’s intentions because of past deceptions and mistrust of the Chinese Communist Party apparatus. China’s statements on the principles of “dignity, reciprocity, and fairness” reflect the Chinese “civilization” outlook. The traditional nation-state approach is based on the Westphalian system, which formalized a different conception of legal equality.

China asserts that its “dignity” must be respected on its own terms; in other words, it insists that the U.S. accept the Chinese definition of “reciprocity” and “fairness.” Beijing promotes the “century of humiliation” narrative, as well as suffering and privations under Mao Zedong, in an echo chamber as part of their strategic approach to the West, and the U.S. in particular. China is under pressure to act as a market economy; but it is not one. For this reason, they see reciprocal enforcement as placing greater demands on China than the U.S.

A recent defeat illustrates this outlook. China sought World Trade Organization market economy status, which was opposed by the European Union, and it lost the case in April. Without market economy status, it can be penalized for dumping under WTO rules.

The Communist Party consensus known as Xi Jinping Thought is possibly reasserting these principles of dignity, reciprocity, and fairness to disguise Chinese deception operations in the trade and technology arenas. Their civilizational outlook is steeped in “deceiving the West” and their tactics stem from operationalizing their interpretation of Sun Tzu’s stratagems.

That being said, can China afford not to have a trade agreement? Since Trump’s recent tariff action, the yuan is depreciating but it is unclear whether this is a market reaction or intentional currency manipulation aimed at offsetting the impact of the new tariffs.

Without drawing premature conclusions, the underlying process also seems to be changing China’s supply chain logistics. The U.S. military sees the issue in terms of national security but it’s actually about real economics: the costs and prices of products. China is moving toward supply chain self-sufficiency in high-tech goods, but not traditional manufacturing. The question is whether China can build a commercially viable economy, under either an authoritarian or modified model.

Two views from the U.S.

Two recent op-eds from former Trump advisers offered different perspectives on the feasibility of a U.S.-China deal. Writing in the Wall Street Journal, Hudson Institute fellow Michael Pillsbury noted four challenges to concluding an enforceable deal with the Chinese:

• China’s incentive to continue cyber warfare and intellectual property theft operations against the United States.

• The difficulty of crafting enforcement mechanisms that are truly enforceable and will not fall victim to Chinese incremental gains, particularly in the area of intellectual property theft. Pillsbury cites China’s history of reneging on agreements, or working to find loopholes against the spirit of a deal.

• China’s continued reliance on state-owned enterprises (SOEs), due to their economic importance as well as their ability to apply political influence effectively. (However, Lighthizer sees SOEs as mired in decline over the longer term, and it will take years to make substantial structural changes. He may be willing to make concessions in this area. In addition, the SOEs will be the key vehicle for importing the $1.5 trillion in U.S. goods already negotiated.)

• Currency manipulation will also be difficult to enforce. The U.S. might not push hard on this issue, but regardless, Pillsbury sees it as not in the U.S.’s interest due to enforcement problems. In any event, the trade deal chapter on currency has already been negotiated.

Pillsbury concludes: “Given these challenges, it’s hardly surprising that the long-negotiated deal appears to be falling apart. China has been busy in these final three weeks trying to weaken the deal. That’s Beijing’s modus operandi: String the West along, then renegotiate and take back earlier concessions from the gullible ‘barbarians.’ “

This raises the issue of whether U.S. negotiators recognized the game China was playing or if they were misled. In a more hostile Washington Post piece, Trump’s former chief strategist Stephen Bannon attempted to stir populist anger, arguing: “whatever emerges won’t be a trade deal. It will be a temporary truce in a years-long economic and strategic war with China.” Bannon is the co-founder of the Committee on the Present Danger: China, a Washington advocacy group. The tone is less thoughtful than Pillsbury’s op-ed, but it reflects anti-China sentiments that are growing in the U.S.

Yet Pillsbury and Bannon are not Trump advisers. If Lighthizer tells the president to go with the deal, Trump will follow his advice. If Lighthizer says to walk away, Trump will bring out his more hard-line advisers, such as Peter Navarro.

Back to a Trump-Xi meeting?

The next several weeks, in the lead-up to what could be the next possible U.S.-China meeting between Trump and Xi at the G20, will be a period of recalibration. In the interim, negotiations may occur at a lower level, and signals may be misinterpreted.

Xi is rethinking what will be needed to finalize a deal. The original idea of getting a final agreement during a Trump-Xi meeting may be on the agenda. Liu told Lighthizer and U.S. Treasury Secretary Steven Mnuchin that he cannot go any further until their bosses talk directly.

China did not interpret its move as backing off from the previous agreement — they believed they were merely clarifying that the demanded changes would be made through regulations rather than law. The idea of holding a Trump-Xi summit in order to finalize the remaining issues has returned. If only around 5 to 10 percent of the deal remains unfinished, Trump and Xi could get it done in person.

Talks have not broken down, although both sides are increasing tariffs. There is still a very real prospect of a deal, and even as tariffs go into effect, both the U.S. and China are preparing to push for a final agreement in June.

Paul Goldstein is the founder, president and chief executive officer of Pacific Tech Bridge (PTB), a consultancy based in Arlington, Virginia, that specializes in global research, cybersecurity and U.S.-Japan corporate cooperation.