US Stops Trade Talks With China: Posturing or Impasse?

The Wall Street Journal has a very useful snapshot of the current state of play on the US-China trade talks, which is that they are going nowhere fast. This has been the situation for some time, if you’ve been paying attention.

As we’ll discuss in more detail, the two sides are engaged in a fight over the shape of the table, as to how the negotiations will proceed, which isn’t a good sign. Reading between the lines, the reason for the jockeying now appears to be to try to prevent Trump from making commitments to Xi at meeting set to take place at a G-20 summit at the end of next month, since Trump is particularly fond of making a show of his authority.

However, even if Trump gives up ground by shooting from the hip next month,¹ it’s not hard to infer that China is not where it expected to be now.

When Trump started with his tariff threats and then action against China, some China watchers, who claimed to represent the thinking of well-placed insiders, were close to smug in their dismissiveness. The Chinese government had a long term perspective and was set up to execute on it, while the US could be guaranteed to change course with elections. Trump would be weakened by the midterms and out after 2020, if not sooner. US business was sure to be unhappy about Trump’s tariffs hurting their interest and they would reduce their support. At worst, the Chinese would just stay the course and ride out this inconvenience.

But the Chinese appeared not to have anticipated that the US would move to impose tariffs on an additional $200 billion of tariffs after the earlier rounds that targeted $34 billion and then an additional $16 billion of imported items. In a departure from past practice, the US Trade Representative is not allowing any exceptions to the $200 billion round of tariffs that come into effect in January, a decision that has retailers up in arms.

Moreover, the tariff imposition does not appear likely to have much impact on the midterms. Trump’s ratings are on the high end of his range as President. Conventional wisdom has long been that the Democrats would pick up 20 to 40 seats in the House. Thanks to the Democrats focusing on identity politics, which cuts both ways, their prospects in the House don’t seem to have improved even with ongoing Trump outrages; Kavanaugh has improved the odds of Republicans picking up seats in the Senate and may even mitigate their losses in the House. The Chinese expected Trump to be walking wounded after the midterms, particularly after choosing goods for their retaliatory tariffs with the goal of undermining Trump support. That doesn’t look like it will be the case.

By contrast, as Marshall Auerback has pointed out, China will come out the bigger loser in a trade war. China’s official growth slowed to 6.5% last quarter, which means the real level was probably lower. China has a large and rising level of debt, to the degree that Steve Keen identified it as crisis prone due to the combination of rapid growth in debt (which added to demand) and the high level it has attained. Keen contends that for China merely to halt its debt growth would trigger a financial meltdown. A new article at Knowledge@ Wharton points out the danger of the highly leveraged structure used in China. So even though the Chinese may contend that tariffs won’t have that much impact on the economy, Trump may have caught China in a window where the tariffs could do disproportionate damage.

Having said that, the US is also going out of its way to poke a stick in the eye of the Chinese geopolitically. There’s a difference between applying pressure and being a jerk, and the Trump team doesn’t appear to have any interest in discerning how far might be counterproductively too far. For instance, Congress is allowing a $330 million arms sale to Taiwan to proceed, which is the second deal of this type in 18 months. Last Monday, two US warships sailed through the Taiwan Strait, leading to harsh denunciations in the official press.

On the trade talks front, the US has broken off talks with China because China is not acceding to the US request to put its ask on the table. The US could claim that it’s already done so. But some of what the US has asked for, like having China reduce its trade surplus with the US by half, is likely seen by the Chinese as so extreme an opener as not to be taken seriously. From the Wall Street Journal:

The U.S. is refusing to resume trade negotiations with China until Beijing comes up with a concrete proposal to address Washington’s complaints about forced technology transfers and other economic issues, officials on both sides of the Pacific said…

Negotiations have been on hold since mid-September, when the Chinese canceled a trip to Washington after the U.S. announced levies on the $200 billion of Chinese imports. Since then, Beijing has sought to re-engage, including asking U.S. Treasury Undersecretary David Malpass to resume talks. He declined—with the backing of the White House trade team—until the Chinese present a formal offer, U.S. officials said…

The impasse comes as tensions between the world’s two largest economies are spreading from trade to national-security issues. Vice President Mike Pence, in a recent speech, railed against China’s acquisition of sensitive technology and its confrontational military posture. Mr. Pence accused Beijing of meddling in U.S. politics, leaving China’s leadership perplexed over the scope of their mounting challenges with Washington…

For Beijing, making a formal offer presents a number of risks, individuals briefed by the Chinese said. First, it would reveal China’s negotiating position. Second, Beijing fears Mr. Trump could make any offer public in a tweet or statement as a way to lock in any concessions by China…

The U.S. is concerned China will string out negotiations and try to get pledges from Mr. Trump in a one-on-one session with Mr. Xi. That would produce agreements that “sort of commit to things that will sound good but aren’t meaningful,” the senior White House official said….

Chinese officials divided the U.S. demands into 142 separate items, which they then placed into three categories, said individuals briefed on the Chinese discussions. Of the demands, 30% to 40% could be done immediately; another 30% to 40% could be negotiated over time; and 20% were off limits because they involve national security or other sensitive issues, they said. Informally named the “80/20 plan” or the “60/20/20 plan,” the idea was presented to the U.S. in mid-August negotiations, U.S. and Chinese officials said.

Chinese negotiators, however, didn’t reveal the items in each of the three categories other than to say 122 of the 142 items were considered negotiable, and they didn’t say how individual items would be handled. Rather, the proposal was conceptual in nature, said U.S. officials, who argue that isn’t t sufficient.

Now the Chinese may be hoping, and they could be correct, that Trump is playing macho with China as part of his midterms strategy and will relent once the elections are past. US businesses are up in arms about the prospect of the tariffs kicking in next January.

Trump is regularly his own worst enemy, so even if he has managed to get China in a less advantaged position, letting the tariffs proceed is a lose/lose, even if China loses more. And as the White House staff clearly worries, Trump’s distaste for detail means he could also undermine himself, or renege on an airy statement, confirming the notion that the US is not agreement capable. That too would undermine getting to an agreement where China makes concessions in return for the US dropping or reducing the tariffs.

Finally, one of the US’s big issues is intellectual property theft by China, both piracy of end consumer goods like software programs and movies, as well as industrial misuse, like patent violations. Even if China were to agree to reforms, it’s hard to see how they could construct an enforcement apparatus that would catch a significant percentage of the violations. So it isn’t clear how China could meet a key US demand.

With the January deadline approaching, I can’t imagine China will do nothing, but it will be interesting to see if they make an effort to reopen talks. Stay tuned.

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¹ Not sure this is a mixed metaphor, since the both images are combat-related.