“Big Divides Remain”: China To Fight US Demands For “Deep Structural Changes” In This Week’s Trade Talks

With trade talks between China and the US set to resume on January 30, when a Chinese delegation of led by Vice Premier Liu He and also includes Yi Gang, governor of China’s central bank, the early warning by Commerce Secretary Wilbur Ross that the two sides remain “miles and miles” apart remains spot on because according to a WSJ update “early indications are that the two sides remain sharply divided, suggesting a hard slog ahead for a deal to be cut before a March 1 deadline.”

While China is prepared to make modest, and largely cosmetic concessions, offering a big increase in purchases of U.S. farm products and energy, along with modest reforms in industrial policies, the WSJ reports that Beijing “will fight U.S. demands for deep structural changes in the Chinese economy” including the elimination of subsidies to favored industries, as well as regulatory help and other aid to Chinese companies, especially state-owned enterprises.

In response to US demands that Beijing has not done enough, Chinese officials say they have already taken concrete steps toward reform, citing more liberal rules for foreign competitors in sectors such as autos and financial services, and tougher enforcement of intellectual property, which however the US side finds insufficient. As a result, a draft negotiating document laying out terms has yet to be assembled, WSJ sources report.

Meanwhile, even those which China has agreed to – such as allowing S&P to offer credit rating services on the mainland, wouldn’t take effect immediately, as there are other bureaucratic hurdles to clear. And eliminating requirements that U.S. firms form joint ventures—a key demand for Washington, which is leery about Chinese firms and officials pressuring U.S. partners to transfer technology—is likely to stretch out over years, said people quoted by the WSJ.

Despite skepticism, markets have already priced in a favorable outcome to the talks, thanks to Treasury Secretary Steven Mnuchin who said on Monday that he expects “significant progress” to be made in the coming days. And yet, just days before the talks resumed, any optimistic mood will be overshadowed by the administration’s actions on Monday against China’s Huawei Technologies when federal prosecutors accused China’s telecom giant of violating U.S. sanctions on Iran and of stealing trade secrets from a U.S. business partner, and made public charges against Huawei Chief Financial Officer Meng Wanzhou, who is fighting extradition to the U.S.

This week’s talks, which will take place in the Eisenhower Executive Office Building next to the White House, are aimed at further delaying or canceling Trump’s plans to raise tariffs on $200 billion of Chinese goods to 25%, up from the 10% levies imposed last year. Mr. Liu is scheduled to meet with President Trump at the end of the talks, Mnuchin said.

As noted above, the Chinese delegation also includes PBOC head Yi Gang who spent many years teaching at Indiana University, while the US side will offer a bevy of cabinet officials, including U.S. Trade Representative Robert Lighthizer, White House trade adviser Peter Navarro and Treasury Secretary Steven Mnuchin.

Despite a nebulous picture for the outcome of this week’s talks, “markets have generally come to the view that tariffs won’t ratchet up and there will be some resolution down the line,” said Seth Carpenter, UBS’s chief U.S. economist. “If we go in the opposite direction, it will have a real impact on the market.”

Already China’s slowing economy is sending shockwaves around the globe, with first Apple, then Caterpillar and Nvidia all complaining about a sharp drop in Chinese demand in recent months, with many claiming that tariffs are the key culprit for the slowing economy.

Nonetheless, perhaps in order to preserve some leverage, U.S. officials said Mr. Trump is prepared to raise tariffs and will rely for advice on Mr. Lighthizer, who believes such measures are necessary to get China to change. Unlike Mnuchin, who has urged to scrap tariffs as soon as possible, Lighthizer has argued in favor of keeping the 10% tariffs in place at least until China has proved that it has lived up to its promises even if the two sides reach a trade deal this week. Lighthizer regularly brings up the importance of enforcement in meetings of administration trade officials, according to National Economic Council Director Larry Kudlow.

China, meanwhile, is urging to scrap all tariffs for the simple reason that the constant threat of new or more tariffs makes economic reform politically risky for Chinese officials, while further threatening to slow down Chinese growth. Should officials make a concession to the U.S., such as handing U.S. firms licenses, they could be criticized within the Communist Party for being soft on the U.S., especially if tariffs aren’t removed in exchange.

Yet in addition to facing pushback from Trump’s trade hawks, Beijing has found that while in the past it could count on U.S. business to back its demands, that support has waned as big companies complain of threats to require them to transfer technology to Chinese partners. Those companies are also trying to get along with a protectionist U.S. administration.

“From our point of view, the tariffs need to go, but realistically the administration doesn’t agree with us,” said Erin Ennis, senior vice president of the U.S.-China Business Council, a trade association of large U.S. firms. “As a consequence, the best scenario is to come up with a plan of action that includes a way to have measurable, commercially meaningful outcomes that are tied to removal of the tariffs.”

How either side will be able to spin that as the favorable outcome from this week’s talks, one which the market has already priced in, remains unclear.