Mandatory Credit: Photo by MARK SCHIEFELBEIN/POOL/EPA-EFE/REX/Shutterstock (10104491a) United States Trade Representative Robert Lighthizer (L), Chinese Vice Premier and lead trade negotiator Liu He (C) and United States Secretary of the Treasury Steven Mnuchin (R) speak before the opening session of trade negotiations at the Diaoyutai State Guesthouse in Beijing, China, 14 February 2019. China and USA trade talks in Beijing - 14 Feb 2019
Robert Lighthizer. Liu He and Steven Mnuchin speak before the opening session of trade negotiations at the Diaoyutai State Guesthouse in Beijing © EPA

Chinese vice-premier Liu He and US trade representative Robert Lighthizer resumed trade negotiations in Beijing on Thursday as markets grow more optimistic they can avoid an escalation of the trade war between the world’s two largest economies.

However, while sentiment over the talks drove Chinese stocks higher this week and helped European stocks to touch a three-month high on Thursday, analysts warned significant obstacles remained to reaching a deal.

The biggest impediment to an agreement by March 1, when US President Donald Trump has threatened to double the tariff currently assessed on about half of all Chinese imports, is disagreement over the backing Chinese companies enjoy from myriad government subsidies, industrial policies and state-owned banks. 

Mr Trump and Mr Lighthizer have repeatedly said that the Chinese government must overhaul or eliminate such support programmes. In his State of the Union address earlier this month, Mr Trump pledged that any deal ending the current trade war would include “real structural change to end unfair trade practices”. 

US officials argue that Chinese subsidies distort markets and competition around the world. In two reports issued last year about allegedly unfair Chinese trade practices, Mr Lighthizer’s agency focused most of its criticism on Beijing’s support for companies investing or operating overseas and on its efforts to promote the development of electric and other “new energy” vehicles.

Chinese negotiators are instead hoping that Mr Trump, in a possible meeting with Chinese president Xi Jinping next month, will agree to a trade deal that focuses on more purchases of US commodities and greater market access for American companies, but will do little to change the workings of China’s state-led economy. 

While Mr Lighthizer argues that support for Chinese companies’ overseas operations “undermines US firms’ ability to compete in the global marketplace on a level playing field”, Mr Liu is not budging. According to people briefed on the trade talks, Mr Liu’s negotiating team has signalled a willingness to be more transparent about Beijing’s various subsidy regimes but is unwilling to scrap or significantly amend any policies singled out by the US. 

Many Chinese officials and analysts view the Trump administration’s demands for difficult structural reforms as an attempt to undermine the country’s successful economic development model. “The US should not request China to change its laws and political and economic system based on its own system,” said Jia Jinjing, a finance expert at Renmin University in Beijing. “The [primacy of] China’s state economy is written into the constitution. If you admit that China is an independent country, you should admit that it is entitled to have its own characteristics.”

The gulf between the two sides’ positions on such “structural” issues was illustrated in a report issued earlier this month by the Office of the US Trade Representative, which accused China of failing to comply with World Trade Organization disclosure requirements for central and local government subsidy programmes.

“Since joining the WTO 17 years ago, China has not yet submitted to the WTO a complete notification of subsidies maintained by the central government,” the report said, adding that Beijing “did not notify [the WTO of] a single [local] government subsidy until July 2016”. For its part, the Chinese government has long insisted that it is in full compliance with all of its WTO obligations. 

Even if Mr Liu is willing and able to come up with what Mr Lighthizer agrees to be a WTO-compliant accounting of all central and local government subsidies in China, negotiating significant changes to any of them ahead of a presidential summit next month is another challenge entirely.

“Transparency would be a first step before prohibition, but even that would be difficult,” said James Green, a senior fellow at Georgetown University and former head of the USTR’s Beijing office. 

Mr Green noted that even if Beijing agrees to scrap a specific subsidy programme, there can be many other funding channels for pet industrial projects, especially at a time when Mr Xi has been emphasising the need for China to become “self-reliant” in a number of technology sectors. “The broader problem is that provincial and party officials look at the outcomes of [party] plenums and Xi Jinping’s speeches,” he said. “They will use their considerable financial muscle to fund these programmes.” 

Additional reporting by Xinning Liu.

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