President’s China trade optimism encounters skepticism

Trade correspondent L.C. writes:

There was no great surprise yesterday, Feb. 24^th, when President Trump tweeted that he has decided to delay the 10% to 25% hike on tariffs on $200 billion of Chinese exports to the US. The president explained:

I am pleased to report that the U.S. has made substantial progress in our trade talks with China on important structural issues including intellectual property protection, technology transfer, agriculture, services, currency, and many other issues. As a result of these very productive talks, I will be delaying the U.S. increase in tariffs now scheduled for March 1. Assuming both sides make additional progress, we will be planning a Summit for President Xi and myself, at Mar-a-Lago, to conclude an agreement. A very good weekend for U.S. & China!

The talks took on a more detailed structure this week as negotiators worked in Washington, DC on six individual Memorandums of Understanding (MOUs) with the end-goal being that they would be incorporated into a final agreement.

Separately, the enforcement mechanism is under discussion – and it is controversial.

Talks are also underway on ten ways China could act to lower its trade surplus with the US, including increased purchases of farm and energy products and semiconductors. On farm purchases, Agriculture Secretary Sonny Perdue announced on Feb. 22nd that China will buy an additional ten million metric tons of US soybeans this year, still well below the amount China traditionally bought from US farmers.

The six MOU areas are:

• Forced tech transfer and cyber-theft,
• Intellectual property,
• Agriculture,
• Non-tariff barriers (which include subsidies and licensing),
• Services, and
• Currency manipulation.

Optimism for currency agreement

The currency provision is reportedly almost concluded, though the mechanism to enforce it has yet to be agreed on. This will likely be whatever mechanism is decided upon for enforcing the entire deal. That remains a key sticking point because Beijing doesn’t want the US to have unilateral authority to snap back tariffs to a punitive level. That, however, is the US administration’s preferred enforcement tool.

The currency issue is tricky, despite being the issue on which the most progress was reported this week. The US reportedly wants a commitment that China would intervene to stop a yuan fall before it depreciates to more than seven to the dollar. But demanding such a heavy-handed anti-market role for the government creates a perception problem for the US, which is supposedly pushing for China to ease its control of the economy. Beijing might be amenable, however, as it doesn’t want the yuan to fall too far since that creates capital flight and other problems for the domestic economy. (In fact, the yuan has been rising this year.) But China is wary of any agreement that would limit its flexibility in the future. For its part, the US wants assurance that if it does snap back tariffs in the future, China can’t counteract them through devaluation.

President surprises his Trade Representative

On Feb. 22nd, the President unexpectedly objected to structuring a deal with MOUs, and so it appears that whatever the outcome of the talks, it won’t be called an MOU. The President interrupted a statement by US Trade Representative (USTR) Lighthizer about progress on MOUs by saying he doesn’t like them because he wants a permanent contract with China. An MOU, he said, doesn’t “mean anything. Either you… make a deal or… not.” MOUs, he insisted, are short-term. When Lighthizer responded by explaining that MOUs in trade negotiations are binding contracts, the President said he disagreed – provoking laughter from Liu — after which Lighthizer asked Liu to agree to never again use the term MOU.

The exchange was startling for several reasons, not least because it indicated that the President hadn’t been at all focused on the details of the talks, since the progress toward six MOUs was the main event this week. This odd public confrontation also fits in with reports of growing difficulties between the President and his USTR.

It also reinforced concerns among many that the President is preparing to conclude a weak deal when he meets with President Xi Jinping, now expected toward the end of March, probably at the Mar-a-Lago resort.

It has been clear for some time that Beijing’s immediate tactic is to delay the tariff hike for as long as possible and drag out the talks since that will increase the pressure from US businesses that are injured by both the Section 301 tariffs and China’s retaliatory tariffs. Should the tariff hike take place anyway, Beijing is reportedly developing a contingency plan to offer more concessions.

Congress concerned over misstep on Huawei

President Trump’s statements this week that he might ease up US efforts to punish and isolate lawbreaking Chinese electronics firms Huawei and ZTE so alarmed legislators of both parties that they publicly attacked the president. The president told reporters that the Huawei/ZTE issue “is right now not something we’ve discussed” (e.g., in the formal trade talks), but “We are going to be discussing all of that during the course of the next couple of weeks. We’ll be talking to the US attorneys [and] attorney general. We’ll be making that decision.”

He thus directly tied the Huawei prosecutions to the trade talks and what he claimed to be his personal, extra-judicial decision-making capability.

An editorial in today’s Wall Street Journal reacted strongly to the president’s statement:

Dropping charges as part of a trade deal would damage the rule of law….U.S. Attorneys aren’t trade negotiators. They’re prosecutors who enforce American law, and last month they unsealed an indictment charging Huawei’s chief financial officer Meng Wanzhou with violating U.S. sanctions against Iran. A separate indictment says Huawei employees stole technology from T-Mobile, the U.S. telecom firm. Suggesting that the U.S. could toss those indictments as part of a trade deal bolsters critics who say the indictments are political….Mr. Trump has already undermined U.S. sanctions policy by letting ZTE, another Chinese telecom firm, off easy. The Commerce Department last year barred U.S. firms from selling to ZTE after ZTE was found to be evading sanctions for a second time and then lying about it. Mr. Trump lifted the sale ban after a personal plea from Chinese President Xi Jinping. ZTE paid a $1.2 billion fine, but Mr. Trump’s intervention made American punishment seem as arbitrary as China’s.

President Trump’s comments on Huawei appear to reflect his view that all global politics is transactional, like a real-estate deal. He seems to think he and Mr. Xi can agree on terms and it will be done. That’s true for Mr. Xi, who runs an authoritarian system where the law is what he dictates. That isn’t true for the U.S., where no one is above the law.

If President Trump uses the Huawei case as a bargaining chip with Beijing – as he used the ZTE situation – it would undercut efforts by US intelligence to protect allied security forces and networks from possible Chinese intrusion. A walkback would be appropriate, something the president has sensibly done before.