Hopes riding high on U.S.-China trade talks, but reality paints a dimmer outlook

Reporting from Washington —  With a high-level Chinese delegation coming to Washington on Wednesday for trade talks, many on Wall Street and in America’s corporate board rooms are hoping it will mark a turning point in President Trump’s trade war with China.

But there’s little chance of a quick resolution or an immediate removal of the tariffs that have been hanging over the fragile global economy.

For one, Trump in recent days has tempered his earlier optimism for a breakthrough. After previously sending tweets such as “talks with China are going very well” and “big progress being made,” Trump’s remarks of late have been more measured. And he’s spoken positively about the money coming in from the tariffs he imposed last year on Chinese goods.

He also has repeated his warning that those tariffs — 10% additional taxes on $200 billion of imported Chinese products, including clothing, fish and suitcases — will go up to 25% after March 1 if there’s no deal by then.

More significantly, Trump’s lowering of expectations for the upcoming two days of talks reflects the reality on the ground.

The kinds of structural changes that U.S. negotiators are demanding from China — halting intellectual property theft and forced technology transfer, for example — simply wouldn’t happen overnight. It would take months for Beijing to implement changes in its books and carry them out in the real economy.

And until it sees real results, the Trump administration isn’t likely to lift tariffs that are in place or give up the option of raising them should China backslide on its commitments. Robert Lighthizer, Trump’s top trade negotiator, is seeking specific and verifiable actions, given China’s vague and unfulfilled promises in the past.

Lighthizer is a longtime China skeptic, but some other administration officials who have Trump’s ear, notably trade advisor Peter Navarro, are outright China hawks and are pushing for a decoupling of America’s economy from China’s, convinced Beijing is a big military and economic threat to the United States. Trump also faces political pressure from China hard-liners on both sides of the aisle in Congress.

“I increasingly worry that the range of [U.S.] demands are such that there will never be a deal,” said Nicholas Lardy, a China economy expert at the Peterson Institute for International Economics.

Chinese officials have signaled a willingness to make meaningful concessions but will probably want some things in return, such as a U.S. pullback on tariffs. And with a March 1 deadline still more than a month away, it’s unlikely that Liu He, Chinese President Xi Jinping’s right-hand man on the economy who is leading the Chinese delegation, will show all his cards right away.

As a result, Claire Reade, a former assistant U.S. trade representative responsible for China and senior counsel at Arnold & Porter, has modest expectations coming out of this week’s negotiations.

“The best realistic outcome is an announcement that they had very constructive talks, are working very hard, and with all the issues on the table, are exploring solutions to them,” she said.

Liu went to the White House twice last year as Xi’s emissary — and was burned both times. On the day of his first visit, Trump announced steel tariffs, and on the second go-around, the president ended up nixing a deal that Liu had struck with Treasury Secretary Steven T. Mnuchin.

On Monday, just before talks were set to begin, the Justice Department fired a legal broadside at Chinese telecom giant Huawei, alleging that the company engaged in a long-running scheme to deceive banks and the U.S. government about its activities in Iran.

The Chinese vice premier will do everything he can to avoid political embarrassment a third time. “The face-saving way out is to announce an extension of talks,” said David Loevinger, an analyst at TCW Emerging Markets Group in Los Angeles and former Treasury Department official on China.

Nonetheless, the renewed senior-level talks, which follow a 90-day cease-fire that Trump and Xi agreed to in Argentina on Dec. 1, have raised hopes among U.S. investors and business leaders that a deal will come together by March 1. That’s a big part of why stock markets have bounced up from their steep declines in December.

To be sure, both sides have incentives to strike a deal. The global economy is weakening, thanks to a flagging European economy and a sharper-than-expected slowing in China, which is contending with a debt overhang and the trade war. The U.S. economy and job market, while still solidly growing, also looks to be softening this year as the stimulus from the tax cuts wears off and financial conditions have tightened.

Trump has frequently said that China badly wants a trade deal because of the hit to its economy and depressed stock market. But Trump has his eyes on volatile U.S. stocks as well, and while China’s economy grew last year at its slowest pace in nearly three decades, it still expanded at a robust 6.6% rate, according to China’s official data.

What’s more, analysts say the United States doesn’t have as much leverage as Trump may think. China isn’t as dependent on trade as in the past. “Their economy is not existentially threatened because of the United States or the trade friction,” Reade said.

Just how much ground China is willing to give remains to be seen, and it’s unclear what will be enough for Trump. He has often talked as if the only thing that matters in economic relations with China, or any other country for that matter, is the trade balance.

By far, America’s biggest trade shortfall is with China. On exchange of goods, the U.S. trade deficit with China probably exceeded a record $400 billion last year, based on the latest data through October.

The Chinese are expected to offer big purchases of U.S. products, particularly agriculture and energy, as well as cuts in Chinese tariffs on imported goods, such as cars. Overall, China’s average tariff level of 9.9% is nearly three times higher than the U.S. rate of 3.5%.

But Lighthizer is pressing for much more than that. What he and many others in government and business want are fundamental changes in the way Beijing operates its economy, specifically an end to policies that unfairly disadvantage U.S. and other foreign players.

China’s subsidies to its domestic companies are a major U.S. sore point.

Under Xi, the Chinese government has strengthened its support of state-owned firms, even though 40% of these enterprises are losing money and have sucked up a lot of bad debt, Lardy says in his new book, “The State Strikes Back: The End of Economic Reform in China.”

Reformers in China would like to cut back on state-owned firms, but the politics of doing so in a timely manner is going be difficult, Lardy said in an interview. And no one thinks that Xi will give up his signature Made in China 2025 blueprint to build up domestic champions to be global leaders in robotics, avionics, new-energy vehicles and other cutting-edge industries.

Another major issue for the U.S. side is China’s long-running practice of requiring foreign firms to set up joint ventures with Chinese partners in order to do business in China. Currently, foreign car manufacturers operating in China, including Ford and General Motors, have a maximum 50% controlling share, and there are lower ownership caps for other industries.

China has announced plans to eliminate or relax such restrictions for auto and other sectors, and analysts say that would allow U.S. firms to operate wholly owned companies in China and thus have greater ability to safeguard their intellectual property, among other things.

During the upcoming talks in Washington, Beijing is likely to hold up a draft of a revamped foreign investment law. Analysts say that could help level the playing field for foreigners in areas such as government procurement, as well as provide protections so they would not be pressured to hand over technologies and trade secrets to have access to the Chinese market.

But even as Beijing is moving on the proposed law, experts wonder whether and when they will yield proven results, if at all. China doesn’t have an independent judiciary and there are a host of other political incentives to spur development of domestic firms. It’s unclear how the changes will be enforced and monitored.

“You can’t just pass a law,” Reade said. “You have to see the activity on the ground that’s changing, but that takes time.”

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