2018-05-08 06:19:03
Hardline demands from both countries raise the risk of a trade war
START with the good news from the trade negotiations between China and America.
After weeks of threatening tariffs and counter-tariffs, representatives from
the world s two biggest economies are at last talking. Over two days of
meetings in Beijing, which ended on May 4th, Chinese and American officials
laid out their grievances and their demands. That, unfortunately, is where the
good news ends. The positions that both sides took were so extreme and
contradictory that compromise appears a remote prospect. What, until now, has
largely been a war of words could easily careen into a full-fledged trade war.
Publicly, the two countries put a positive gloss on the outcome. Xinhua, China
s official news agency, described the talks as candid and constructive. It
noted that they had agreed on some issues and recognised their considerable
differences on others. On the evening the talks closed, President Donald Trump
tweeted a sentiment that, by his standards, was sympathetic: it is hard for
China in that they have become very spoiled with U.S. trade wins (that is,
with beating America in the trade arena, which Mr Trump firmly believes China
has).
If those public statements were all observers had to go on, the conclusion
might well be that the talks had been successful. Instead, the two countries
detailed negotiating positions were widely leaked. It is clear that they have
been talking at, rather than with, each other.
The American demand that made the most headlines was that China should cut its
massive bilateral trade surplus by $200bn by the end of 2020. That would amount
to a roughly 60% reduction in China s surplus within three years, which is far
from credible. But numbers are at least negotiable. More troubling from China s
perspective were demands focused on its economic policy. The Americans asked
China to stop providing subsidies to a range of sectors that the Chinese
government has deemed strategic, from robotics to electric vehicles. They
demanded that Chinese tariffs on American products be no higher than American
tariffs on Chinese products. And they told China to open its market much more
widely to foreign investors, setting July 1st as a deadline.
Before travelling to Beijing, Robert Lighthizer, the United States Trade
Representative (pictured, centre), had said his objective was not to change the
Chinese system but to open it up. Taken in its entirety, though, the American
position amounts to a demand for a new economic model in China. That Mr
Lighthizer, long a China hawk, has taken a hardline stance is not surprising.
But it was striking to see his views emerge virtually undistilled as the
American position. Some had thought that doveish members of the American
delegation, notably Steven Mnuchin, the treasury secretary, would make for a
more moderate stance. So much for that.
China, for its part, also made a series of demands that were non-starters. To
increase its purchases from America, it asked that the American government ease
controls on exports of technology that could have military applications. These
controls, in place for nearly three decades, are not about to be relaxed given
that America has just classified China as a rival power. China asked that
America open its market to Chinese information-technology products. America is
going in the opposite direction, viewing more and more Chinese tech with
suspicion.
China also asked that America recognise it as a market economy at the World
Trade Organisation, lessening the scope for punishment in trade disputes. If
America fails to do so, China said it would likewise treat America as a
non-market economy at the WTO. Had the talks in Beijing gone well, it was
expected that Xi Jinping, China s president, or Wang Qishan, his trusted
lieutenant on American relations, would meet Mr Trump s trade team. No meeting
took place.
The question about the duelling demands is to what extent they are simply
aggressive opening moves. The countries might soften their stances as
negotiations continue. But there is a chasm between them on foundational
issues. China is determined to become a tech power, and is unabashed about
using industrial policy to get there; America sees China s advance as a threat
and believes its industrial policies harm American companies. The American
objection to China as a state-controlled economy cannot be squared with China s
insistence that it is already a market economy. The timeline is also tight.
Starting on May 23rd, America can legally impose its first set of tariffs
against China, affecting roughly $50bn of goods. China will retaliate without
delay.
There were some glimpses of common ground, however limited. Both countries said
they wanted to meet regularly. Both talked about wanting a balanced trade
relationship, in which China buys more from America. But building on this
common ground requires mutual goodwill, which is in short supply. Mr Trump and
Mr Xi have tried to cultivate reputations as staunch defenders of their
national interests. Now that their negotiating positions are publicly known,
the worry is that the two leaders, unwilling to look weak, will dig in.