US economy

US and China trade officials set for crunch time


It is crunch time for the US-China trade talks. By the time Liu He, China’s top economic official, visits Washington next week to meet Robert Lighthizer, the US trade representative, and the rest of Donald Trump’s negotiating team, the sides will have one month left to strike a deal or face a new escalation of tariffs.

Since Mr Trump and Xi Jinping, China’s president, launched the talks over a steak dinner in Buenos Aires on December 1, officials have made some progress in one area that the US leader has often lamented: boosting China’s purchases of US goods to narrow the trade deficit between the countries. 

But that is a secondary issue compared to the main sources of commercial tension between the world’s two economic superpowers. The US is demanding “structural” changes to Chinese economic policies on everything from the plundering of American intellectual property to discrimination against US companies and Beijing’s rampant subsidisation of certain industries.

If these do not begin to get tackled over the coming month, it is hard to imagine Mr Lighthizer — or indeed Mr Trump — signing off on any deal.

For Beijing, it will be almost impossible to meet all of these US demands without essentially giving up on its economic model, which is what makes them so thorny. 

“This is going to be what determines whether any of this is successful,” said Erin Ennis, senior vice-president at the US-China Business Council in Washington. “To get into that level of detail and genuinely be able to agree on what the problem is, what the solution is, and how you evaluate that, could be a game-changer.” 

Douglas Rediker, a former Obama administration official and founder of International Capital Strategies, a consultancy in Washington, said one main question is “what level of engagement and progress is sufficient to warrant a declaration of success” — particularly for Mr Trump.

The other big issue is how an agreement on areas that are outside the remit of traditional trade talks and in the realm of domestic regulations could ever be enforced. “If China claims we have the legal framework to protect IP and the court system to do that, then the US would ask for a demonstration of their willingness to bring cases,” said Stephanie Segal, a senior fellow at the Center for Strategic and International Studies. 

Here are three key categories of “structural” changes the US is trying to secure, and whether China might be willing to compromise. 

1. Technology transfers

What the US wants

US officials want China to rein in a series of practices that, in their eyes, amount to a plunder of US technological innovation by the authorities in Beijing, designed to help China’s private and state-owned enterprise leapfrog American companies. The main gripes are that China compels US companies to hand over sensitive technologies in exchange for market access, and actively encourages the theft of intellectual property and the infringement of patents, including through cyber-espionage. Washington would like China to overhaul a web of laws and regulations to give far greater protection for US companies from these threats — including higher penalties for any infractions and a mechanism to ensure that Beijing complies with its commitments. 

China’s position

China contends that foreign companies are not compelled to transfer technology. Instead, Beijing’s negotiators argue that some overseas investors have done so voluntarily through joint ventures and other structures in return for access to Chinese markets. The Chinese government has, however, outlined timetables for phasing out joint-venture requirements in the financial and automotive sectors. A revised foreign investment law will also formally ban local governments from requiring foreign investors to transfer proprietary technologies. 

US demands about cyber-espionage are much harder for the Chinese government to respond to. Mr Xi ’s administration is adamant that it has abided by the terms of a 2015 agreement with the US not to engage in cyber-espionage and categorically rejected detailed accusations, made by the US justice department and others, that Chinese military and other state-supported hacking groups have systematically violated that agreement.

2. Economic discrimination

What the US wants 

US officials believe that the Chinese market is set up in a way that makes it extremely difficult for American companies to compete fairly with their domestic counterparts. One huge bone of contention is China’s restrictions on foreign ownership of its own businesses, which are judged to be too broad in a number of sectors — including financial services — that are not strictly related to national security.

But relaxing those rules would just be the start. US companies complain that China’s licensing regime is confined to Chinese applicants, forcing them to find a domestic partner to overcome key regulatory hurdles. They are unhappy with data localisation requirements that hamper cross-border digital flows. Finally, they would also like to see China’s procurement market opened up to foreign competition, and assurances that antitrust actions are not unfairly favourable to domestic companies. 

China’s position

At the first round of trade talks last May, Mr Liu made it clear that China would not make market access or other concessions in sectors that it deems essential to national security such as cloud computing. 

National security concerns are at the heart of Beijing’s drive over recent years to force foreign investors to store customer and other sensitive data onshore. The Chinese government will also not relax its strict Internet censorship regime to allow in companies such as Facebook and Twitter, platforms blocked in China. 

Moves by the US over the past year to constrain the development of Chinese tech champions such as ZTE and Huawei have only hardened Beijing’s resolve not to open its own markets to America’s largest technology companies. The Chinese government also continues to use its licensing regimes to block market access. China’s central bank, for example, opened the online payments market to foreign companies but then delayed formal acceptance of licence applications from Visa and Mastercard.

3. Government support

What the US wants 

US officials have long complained that China uses unfair trade practices, such as dumping, to promote its export-driven economy. But they are now casting the web more broadly. Ideally, they would like Beijing to slash subsidies to domestic industries across a wide range of sectors. These include traditional goods such as agriculture and metals, including steel and aluminium — but also cutting-edge industries such as aerospace and telecommunications explicitly earmarked for government support under Mr Xi’s “ Made in China 2025” industrial strategy. Meanwhile, the US would like to see greater curbs, and ideally less investment, by the Chinese government on state-owned enterprises. 

China’s position

Mr Liu and other reform-minded officials are willing to revise or even formally replace Made in China 2025, as they dislike the investment surges and overcapacity that often results from such industrial policies. But the underlying goal of the initiative, which is to become a world-class producer of semiconductors and other critical technology products, will not be abandoned, especially after the Trump administration demonstrated last year that it could cripple companies such as ZTE with a simple ban on sourcing of US components. 

More sweeping changes to the Chinese Communist party’s control of the financial system and strategic industries, exercised through state-owned banks and enterprises, are anathema to Mr Xi’s administration. They believe that such levers have been critical to both China’s economic success over the past 40 years and its ability to maintain economic and social stability.



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