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【Bloomberg】With 100-Day Sweetener Talks

Thursday,Jul 06, 2017

For China, the most important achievement of the 100 days of trade talks with the U.S. now coming to a close might be keeping its counterpart at the table.

Negotiations due to end on July 16 have yielded some progress already, such as getting American beef back in Chinese stores, a small step toward addressing the $347 billion U.S. deficit on $578.6 billion in trade last year.

But even amid continued engagement, major breakthroughs look less likely with President Xi Jinping complaining of a “negative” turn in relations just before his expected meeting with Donald Trump this week, and escalating tension over North Korea that the U.S. links to trade.

For the world’s second-largest economy, the talks are a goodwill gesture to maintain friendly economic ties and avoid White House ire, said Wang Youxin, an analyst at Bank of China’s Institute of International Finance in Beijing. "We make some concessions, give them a sweetener," he said.

The lifting of China’s 14-year ban on U.S. beef imports is one of the initial deals, dubbed "early harvests," that allow both sides to say they’re making progress. Related benefits include a surge in U.S. crude oil imports since April and an increase in the purchase of American liquid natural gas.

In addition, China has approved two out of eight biotechnology product applications from the U.S., and the central bank said this week it will allow foreign-owned financial services firms to compile and issue credit ratings in the domestic bond market.

"The talks show China understands U.S. concerns -- we’re paying attention, we’re willing to cooperate, and we’re determined to produce deliverables," said Wei Jianguo, a former vice commerce minister and now vice chairman of the China Center for International Economic Exchanges, a Beijing-based think tank. The negotiation style fits Trump’s temperament and can help send positive messages, he said.

Still, that dialog is being interrupted by the standoff between the U.S. and North Korea over the latter’s nuclear program. After Pyongyang’s testing of a intercontinental ballistic missile this week, Trump has linked his frustration over the regime to his willingness to compromise on trade with China.

“Trade between China and North Korea grew almost 40% in the first quarter. So much for China working with us - but we had to give it a try!” Trump said Wednesday on Twitter.

Ministry of Commerce data show trade with North Korea rose 13.7 percent in the first five months from a year earlier. Exports rose 32 percent while imports contracted 9.3 percent.

‘Good Start’

"Trump and China have had a good start, but now it’s hit a bump on the North Korea issue," said Wang Huiyao, director of Beijing-based think tank China Center For Globalization(CCG). "There are opportunities for China and the U.S. to sit down and talk to find a way out as the 100-day trade talks are still ongoing, Xi and Trump are set to meet at G-20, and Trump is going to visit China this year. China-U.S. trade is the basis of bilateral relations and none can afford a trade war. The world can’t either."

"China’s economic relations with the U.S. are always not just about the economic issues, and there are always other interests involved. The recent North Korea provocations could possibly exert some negative impact, as Trump may get impatient and anxious and start to pressure China," Song Hong, a senior fellow at the Chinese Academy of Social Sciences, which advises the government on policy.

Positive Sign

The 100-day talks are making good progress, according to Zhu Guangyao, China’s vice finance minister. The two nations have contacts "every morning and every evening," Zhu said at a press conference at the G-20 meeting in Hamburg on Thursday. China has also studied Trump’s books on how to do deals, Zhu, who is also a lead negotiator in the trade talks, said.

Some Chinese analysts share the view that what truly matters about the 100-day talks is keeping both sides together at the negotiation table and avoiding a trade war, according to Lu Zhengwei, chief economist at Industrial Bank Co. in Shanghai.

Agriculture and energy are the trade domains most likely to show additional progress, according to Lester Ross, a partner in the Beijing office of U.S. law firm WilmerHale who also leads the policy committee of the American Chamber of Commerce in China.

China’s commerce ministry said in a May report that it wants to increase U.S. agricultural imports such as soybeans and cotton, along with energy products including liquid natural gas, crude oil and refined oil, plus aircraft, integrated circuits and machine tools.

Such gains are less impressive in a broader context of the world’s largest trading nation: China’s customs data show total beef imports stood at $2.5 billion in 2016, while crude purchases totaled $116.5 billion -- and machinery imports came in at $771.4 billion. Allowing foreign credit rating firms to compete in the domestic market was a long-awaited step that’s part of a broader reform plan to open up the financial system.

Asymmetric Access

The trade plan could erode some of China’s trade surplus with the U.S., and to a larger extent if the imports boost expands to more sectors, said Wang. But the bigger challenge in the negotiations will be to persuade China to further open service sectors including education, finance and health care, he said.

Ross said American businesses are more worried about asymmetric market access, in which they’re blocked from operating or acquiring in large swathes of the economy while Chinese companies are mostly unencumbered in the U.S. Bigger Chinese commitments are needed to lower barriers for the U.S. firms, he said, calling the new foreign investment guidelines "limited progress" toward leveling the playing field.

"The 100-day trade plan could very well be a trap for the U.S.," said James McGregor, China chairman of business advisory firm Apco Worldwide Inc. and a former AmCham chairman. "After a few concessions on each side, then China may consider that things are back to business as usual with the various industrial and technology policies that are very threatening to the future of the U.S. businesses."

In the lead-up to Xi meeting Trump on the sidelines of the G-20 summit in Hamburg, old disputes are resurfacing and cooling the warmth that followed their Florida summit. The U.S. has in recent days made a naval patrol past a Chinese-controlled islet, announced an arms sale to Taiwan, ranked China among major human-trafficking offenders, and called on Beijing to let ailing Noble Peace Prize winner Liu Xiaobo seek cancer treatment abroad.

“Ties are also affected by some negative elements, and the Chinese side has already expressed our stance to the U.S.,” Xi told Trump, state television reported Monday.

Those issues aside, economic relations are still a long way from the worst-case scenario. Trump, elected last year after more than two decades of criticizing China’s trade policy and a campaign full of promises to fight it, has eased off threats since meeting Xi at Mar-a-Lago.

"Reversals in Trump’s attitude are like a negotiation tactic, or bluff, to get a better deal," said Lu. China and the U.S. may "draw their swords," he said, but won’t really fight.

From Bloomberg,2017-07-06
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