The United States and China's first round of high-level trade talks ended May 4 with little progress made. The prospect of a quick resolution to the trade spat between China and the United States was never high to begin with, but two days of talks in Beijing saw the U.S. delegation, which included Treasury Secretary Steven Mnuchin and Trade Representative Robert Lighthizer, issue its demands to Chinese negotiators. Beijing and Washington are in for a long haul before they find common ground.
The U.S. demands can be grouped around six key themes:
1. Trade Balance. The United States wants China to cut its trade surplus with the United States by $200 billion by the end of 2020 compared with 2018 levels. The U.S. demand also requires that China reach 75 percent of its commitment to increase its purchase of U.S. goods by $100 billion for the year starting June 1, 2018, and that it meet 50 percent of an additional $100 billion increase for the year beginning June 1, 2019.
2. Intellectual Property and Technology Theft. The U.S. delegation demanded Beijing immediately halt the subsidies and support its gives industries as part of its Made in China 2025 plan to make the country a leader in advanced technologies, stop policies that promote technology transfers, and stop government-backed cyber theft of intellectual property. In addition, the United States wants China to withdraw its complaint at the World Trade Organization about the Section 301 investigation by July 1 and to not respond in kind to any actions that the United States takes against China as an outcome of the investigation — such as placing 25 percent tariffs on $50 billion worth of goods.
3. Tariffs and Non-Tariff Barriers. The United States wants China to further open up its economy to foreign imports, demanding that China lower its tariffs to U.S. levels in all noncritical sectors. The United States also demands China remove certain non-tariff barriers in many key sectors, including those associated with its Made in China 2025 initiative, while also recognizing that the United States will impose tariffs and restrictions in critical sectors. The United States also demanded China open up its economy for U.S. services and agricultural products.
4. Investment Restrictions. With the United States planning on significant investment restrictions on Chinese investors in strategic sectors, it is demanding that China not challenge them or retaliate.
5. China's Investment Restrictions. The United States is demanding that China make it easier for U.S. companies to invest in the country. It wants Beijing to improve its negative list for foreign investment (this is a list of sectors where China bans foreign investment and/or requires regulators to grant special approval) by July 1, 2018, after which time the United States will within 90 days come up with a list of specific existing restrictions that deny U.S. access, which it will then want China to remedy. The United States also wants the removal of foreign investment restriction and ownership requirements.
6. China's Non-Market Economy Status. The United States wants China to drop the vital case at the WTO challenging U.S. treatment of China as a non-market economy.
The United States also presented China with an implementation plan that includes quarterly reviews for noncompliance and forbids China from challenging any trade enforcement mechanisms the United States takes against it. The United States even says that China must provide full details of shipments that are being transshipped through third countries within 15 days of being notified, or additional tariffs will be applied.
To be blunt, the U.S. demands are ridiculous. There simply is no way that Beijing bows down to the United States and agrees to a deal where the United States demands total acquiescence from China on certain issues but gives nothing in return. However, as we have seen with NAFTA and other trade negotiations, the administration of U.S. President Donald Trump has established a pattern of applying and issuing maximalist pressure and demands that it ultimately pares down. The question here is by how much and at what cost.
China won't step down entirely from the U.S. pressure. In a forum held with leading Chinese advisers before its talks with the U.S. delegation, Beijing outlined a strategy not to kowtow to Washington. Why? The answer is quite simple. With China's technological prowess now getting close to matching that of the West, and with China's economic size now nearly equaling that of the United States, Beijing thinks it can stand toe-to-toe with Washington on the issue of trade. Of course, China is likely to take a pragmatic approach. It may concede to U.S. demands on tariffs, boosting U.S. imports and liberalizing certain sectors of its economy, but it will not give up its support of Chinese industry, nor will it agree to U.S. demands not to retaliate, though it may agree to ease existing responses.
The lead-up to this round of talks was remarkable in that there were no technical negotiations ahead of minister-level talks. Now that the United States has issued its demands at the highest levels, the next round of talks will involve teams of technical negotiators working to an agreement and the United States prioritizing its demands while China does the same with its potential concessions.