McLARTY TRADE UPDATE: US and China moving toward deal, but uncertainties remain
April 16, 2019
- US-China trade talks are edging closer to conclusion, with the sides agreeing to establish an enforcement office in each country. Progress is expected regarding investment provisions and intellectual property, while subsidies should advance less.
- The fate of existing tariffs is still a sticking point, as the Trump Administration has pushed Beijing to shift retaliatory tariffs away from agricultural products.
- The countries may sign a deal as soon as May, but timing will depend on the feasibility of a Trump-Xi summit, progress made on tariffs, and details surrounding the enforcement mechanism.
American and Chinese negotiators are nearing agreement. A key advance has been the establishment of an enforcement office on each side, with Beijing’s falling directly under Vice Premier Liu He’s oversight. This announcement by Treasury Secretary Mnuchin indicates both sides have agreed to take on commitments, but the powers attributed to these offices have not been revealed. Also unclear is whether US commitments will be face-saving or substantive. The Both Trump and Xi are pushing to finalize a deal soonest, perhaps as early as May. However, the last stage of negotiations will be the most challenging, despite the optimism expressed by Mnuchin on Saturday that the sides are “hopeful” and “getting close to the final round of concluding issues.”
Tariffs remain a sticking point. While Beijing has pushed for removal of all US 301 tariffs as part of any agreement, the United States seeks to keep some – ideally all — tariffs in place as leverage, with the option of additional or snapback duties in the event of Chinese noncompliance. Trump’s reluctance to back down on already-applied duties, have reportedly led USTR to suggest that Beijing shift its retaliatory duties on $50 billion worth of US products to non-agricultural imports to create a better story for US farmers prior to the 2020 presidential campaign.
While Beijing has also offered to buy more US commodities, Agriculture Secretary Perdue said in mid-March that the United States remains “concerned over some biotech issues.” Washington has pushed Beijing to significantly shorten the biotech regulatory process, and we may see more trait approvals as part of the final package, based on soundings with senior USDA officials.
While ambitious progress is expected in areas acceptable to the Chinese, such as foreign investment and enhanced intellectual property rights protection, US negotiators have reportedly tempered demands regarding China state subsidies, due to strong resistance from Beijing. In its WTO complaint, Washington had listed more than 500 different subsidies Beijing has applied that allegedly disadvantage foreign investors vs. Chinese state-owned enterprises. A real fix to address Chinese subsidies may only be achievable through multilateral pressure.
In areas like cloud computing, Beijing appears to have made more concessions. Vice Premier Liu He sweetened China’s position earlier this month, offering to issue more licenses for data centers and to allow foreign cloud-computing companies to operate without a domestic partner in a free-trade zone. But the extent to which the liberalization trial would benefit US cloud computing companies remains in question.
President Trump said on April 4 that a “very monumental” deal could be announced in roughly four weeks, “maybe less, maybe more.” We expect a Trump-Xi summit of some sort to conclude the talks, likely in Washington. Signing a deal on the margin of June’s G20 summit in Japan had been floated earlier, but we understand is seen as a less favorable option in Beijing.
Even though Huawei’s founder and CEO Ren Zhengfei said in an interview with CNBC this week that his company does not “have much influence over China-US trade relations,” we expect continued, intensified national security scrutiny and the legal charges against the world’s largest telecoms equipment maker and its executives will continue to weigh on the bilateral relationship.
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