During a closed-door meeting with Austrian chancellor Sebastian Kurz last week, Xi Jinping was asked what he thought the chances were for a successful conclusion of this week’s China-US trade talks in Washington. “Fifty-fifty,” the Chinese president replied, according to three people briefed on the discussion.
Those odds changed dramatically on Monday morning after Mr Xi was greeted by tweets from US president Donald Trump threatening to raise tariffs on Chinese exports to the US as early as Friday. The move enraged officials in Beijing.
As of mid-afternoon on Monday, it appeared likely that Mr Xi’s lead trade negotiator would at least choose to delay his planned trip to Washington this week for a “final round” of trade talks that both sides had strongly hinted would result in a draft agreement.
One Chinese government policy adviser told the Financial Times that executives at large state-owned enterprises who had planned to join vice-premier Liu He’s delegation were hastily rearranging their travel plans. Chinese state-owned enterprises (SOEs) were expected to play a central role in any agreement to end the trade war between the world’s two largest economies, because they would be the principal buyers of US agricultural and energy exports.
Another person briefed on the negotiations said Chinese officials were still standing by for a shorter trip, with a much smaller delegation, later this week. “Everything is up for grabs,” the person said. “But it’s hard to believe they would leave if Trump is imposing new tariffs on Friday. That’s a big gamble for Xi.”
While Mr Xi’s administration is happy to agree to large SOE purchases of US commodities aimed at reducing the two countries’ trade imbalance, Mr Trump suggested that Chinese negotiators were backtracking on other understandings related to Beijing’s industrial policies. These included protection of US commercial secrets and “enforcement mechanisms” if either side felt the other had breached the terms of the agreement.
“The Trade Deal with China continues, but too slowly, as they attempt to renegotiate. No!” Mr Trump said in a tweet.
Robert Lighthizer, US trade representative, wants to roll back existing tariffs, which affect about half of all Chinese exports to the US, in phases. Mr Liu has argued for both sides to immediately repeal punitive tariffs imposed by their countries since the trade war erupted last summer.
Wang Yong, an international trade expert at Peking University, said such haggling was not surprising as the two sides raced to finalise an agreement. “The Chinese side has begun to review the agreement internally, which has led the Chinese side to renegotiate some aspects,” said Prof Wang. “The biggest difference between the two sides is Trump’s insistence on retaining some tariffs. From a domestic political perspective, this is very difficult for China to accept.”
Chinese officials and advisers are also confident that better than expected economic growth in the world’s second-largest economy, combined with Mr Xi’s intolerance of all forms of dissent, will strengthen Beijing’s hand while Mr Trump will have to contend with a political backlash at home.
“Pressure in the US markets will appear soon,” said Prof Wang. “China is in a better negotiating position, so there is no need to rush. If they don’t want this agreement now, the US will lose more than China will.”
Arthur Kroeber at Gavekal Research said: “It was always unrealistic to think that China would throw overboard its entire development model in order to secure a quick truce with the US.” He added that Mr Trump now faced a choice of having to “deliver his tariff increase”, which would almost certainly make markets tank, “or finding a face-saving way to claim that his threat forced some Chinese movement”.
Over recent weeks, US farmers, financial markets and commercial groups have been looking forward to a resolution of the two countries’ year-long trade war, encouraged by optimistic statements about the talks from Mr Trump, Steven Mnuchin, the Treasury secretary, and Larry Kudlow, the White House economic adviser.
“The existing tariffs are damaging to American companies and consumers, and additional tariffs will compound those damages,” said Jake Parker, head of the US-China Business Council’s Beijing office. “Both sides need to use this week to make progress on the negotiations rather than returning us to tariff battles.”
James Zimmerman, a Beijing-based partner at law firm Perkins Coie and former head of the American Chamber of Commerce in China, said Mr Trump’s surprise threats betrayed the US president’s “total misunderstanding on how to negotiate with the Chinese”.
Last September, Mr Liu cancelled plans to travel to Washington for a critical negotiating round after Mr Trump followed through on a similar threat. Members of the vice-premier’s negotiating team have also said repeatedly that they will never negotiate “with a knife at our throat”.
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