The Dec. 5 arrest of Huawei Chief Financial Officer Meng Wanzhou in Canada at the request of the United States added an unexpected twist to trade tensions between the United States and China less than a week after U.S. President Donald Trump and Chinese President Xi Jinping agreed to pause the escalating trade war between their countries to give negotiators three months to reach a deal.
Even before Meng's arrest, there were ample reasons to be skeptical that the 90-day truce that Trump and Xi struck over dinner at last week's Group of 20 summit in Argentina could be sustained. For one, there were several discrepancies between the U.S. and Chinese announcements of the truce. And just before the G-20 sit-down, the White House had released an updated Section 301 investigation report on China's technology transfer rules and was rumored to be considering opening up another Section 301 investigation of China's labor practices to add to its ammunition against Beijing. Furthermore, the three months given to the tariff cease-fire to allow negotiations over complex trade issues poses a difficult, if not impossible, timetable, given the two sides' core differences over China's overall industrial policy and state-led economic system.
Stratfor's 2019 Annual Forecast examines how Beijing, amid the U.S.-China trade war, will work to keep the lines of communication open with Washington and will offer to buy more U.S. goods and make other selective concessions. The forecast also looks at the strict limitations any Chinese outreach will encounter, particularly as the United States continues to ratchet up its demands. China's internal imperatives also mean it will not meet U.S. demands for deeper structural reforms. The apparent trade truce agreed to by China and the United States at last week's G-20 summit — and complications surrounding it — sets the tone for the next phase of tough negotiations.
With the 90-day clock ticking and the world watching anxiously to see how the two powers manage their tariff war and long-term competition, China has signaled that it will make an effort to meet some U.S. demands by conceding some low-hanging fruit, while taking actions to fulfill its domestic reform pledges. Chinese officials said they will start to immediately implement specific items that China and the United States have agreed on in the agricultural, automobile and energy sectors, although they offered no clear timetable for the changes or their size. Meanwhile, China's National Development and Reform Commission announced on Dec. 4 a host of new penalties for intellectual property theft that will take effect shortly. Punitive measures for violations will include restrictions on access to bond issuances and other financing tools, preferential treatment, foreign trade, land- and property-purchasing privileges, participation in the government's procurement program, board appointments at state-owned companies, and even vacations. The names of violators will be posted on a government website, and financial institutions will evaluate violators' records when making lending decisions.
Shortly after Trump's Dec. 1 dinner meeting with Xi, the White House released a statement saying that the United States would forego an increase in tariffs on $200 billion in Chinese imports from 10 percent to 25 percent that it had been preparing to institute on Jan. 1 to give negotiators 90 days to reach an agreement on issues such as intellectual property theft and non-tariff barriers. While White House officials sent mixed signals about when the truce period would begin, Trump tweeted on Dec. 4 that the 90-day clock began ticking after his dinner with Xi ended. The U.S. negotiation team is led by Trade Representative Robert Lighthizer, who favors using tariffs as leverage and will make concrete demands for structural economic changes in China. A 30-member Chinese delegation led by Vice Premier Liu He will reportedly visit the United States next week to kick off the talks.
With the 90-day period underway, White House officials are rushing to outline their expectations for China in the coming talks. Beyond what was outlined in the post-dinner statement — that China agreed to immediately import an unspecified amount of agricultural, energy and other products, review, if resubmitted, the merger between Qualcomm and NXP Semiconductors that it had rejected, and move to curb fentanyl flows to the United States — Trump tweeted on Dec. 2 that China would remove its auto tariffs. (White House economic adviser Larry Kudlow followed Trump's tweet by saying that auto tariffs could go "quickly to zero.") Notably, Lighthizer had set out auto tariffs as a goal ahead of Trump's meeting with Xi. For its part, China has not confirmed any of the details released by the United States and is conspicuously avoiding comment, only acknowledging a deal to not raise tariffs and continue negotiations. U.S. Treasury Secretary Steven Mnuchin, meanwhile, said the Chinese government had made $1.2 trillion in additional trade commitments, including on agriculture, without specifying a timeline or the types of products.
Why It Matters
That said, there remain areas in which China can offer easy concessions to the United States, especially considering that several U.S. demands align with Beijing's own reform agenda anyway. For China, any pause in the trade war gives it breathing room, and as always, negotiating remains a top Chinese priority. Beijing sees the trade war as only the beginning of a long-term U.S. strategic and economic campaign to apply pressure on China. It therefore has little expectation that trade concessions will lead the United States to soften its overall stance. Still, with the high risks that the trade war poses to China's domestic economy, and the lessons learned regarding the Trump administration's hard resolve to compete with China, there are several areas beyond buying more U.S. goods where China could be willing to offer concessions that fulfill its own reform agenda while at the same time allowing the Trump administration to score a political victory.
Common ground and obvious concessions will take the United States and China only so far over the next 90 days.
What To Look for Next
Intellectual property protection. Improving protections on intellectual property is one area we are watching, as China has its own technology industry to safeguard. Chinese companies have been increasingly calling on the government to crack down on intellectual property violations that are harming their drive to foster an innovation-led economy. But it remains unclear whether such protections will amount to an acceptable concession to the White House, given that they will be rolled out incrementally and depend to a high degree on how strongly they are enforced. The latest Chinese reforms focus on punitive measures. There are still big questions when it comes to timelines and whether such provisions will apply to the types of intellectual property violations the United States is trying to curb and to what degree foreign companies will still be discriminated against versus Chinese companies. For the United States, the intellectual property concern isn't one that can be solved by increasing penalties, but must include changes that bar or limit technology-transfer requirements in joint ventures and business partnerships.
Market access. Even before the trade war began to escalate, the Chinese government attempted several times to respond to U.S. demands for market reciprocity. In part, Beijing has eased foreign ownership caps in the automotive and financial sectors, taken items off the list of sectors not open to foreign investment, and promised to open up more manufacturing and service sectors such as telecom, shipbuilding and medical services. In fast-tracking market access to European companies and several others, Beijing is also trying to show its commitment to accelerating its own timetables and easing regulatory obstacles, and to keep those options at hand when it comes to the negotiating table with the United States.
Beijing has to carefully balance this move against the pitfalls and risks that any opening entails, and its measures will almost surely fall below U.S. expectations. Still, the trade war with the United States has raised the stakes for China and has also strengthened the voice of China's pro-reform camp, which sees greater market access as an impetus to the country's long-term reform and economic development. Trump hopes to tell U.S. autoworkers that he opened up China's auto market to foreign cars and will push for China's tariffs in the sector to be reduced. But nothing on the issue appears close to being finalized, and China will want a concrete reduction in U.S. pressure (that is, tariffs against itself) in exchange for increasing market access and reducing additional tariffs.
State-owned enterprises. Reform of state-owned enterprises (SOEs) is another area in which China could find ways to align its desire for change with U.S. demands. Beijing is not likely to reduce state support below U.S. targets in sectors central to its Made in China 2025 initiative like semiconductors and aviation, where China is racing to gain greater independence. But with its internal drive to boost the competitiveness of SOEs, Beijing will likely extend reforms that offer greater market access or ease state support in other areas. Indeed, internal Chinese policy debates in recent months have intensified, and officials are increasingly speaking of "competitive neutrality" when hinting at the next stage of reforms.
In this context, Beijing may be willing to offer more access for foreign and private capital in non-strategic industries such as finance, high-tech, telecom and energy, and to diversify SOE structures to include some private-sector shares to lessen the influence of state capital. However, there will be limits. While Beijing aims to assure both domestic and foreign private businesses of its commitment to reform, any changes will likely be used to defend the practices of its overseas SOEs from foreign governments.
What Are the Stakes?
Common ground and obvious concessions will take the United States and China only so far over the next 90 days. Issues such as cooperation in cyberspace and reducing automotive and other tariffs will be unlikely without reciprocal treatment from the United States. At the same time, there is the possibility that China will make enough concessions within the negotiation window that Washington will agree to extend the trade truce.
Whether any of China's concessions placate U.S. negotiators is another story. For this reason, the next stage of talks will boil down to a question of political will on the part of the White House. If the Trump administration feels compelled to claim a political win for a domestic audience, it can frame the easier trade concessions China is more likely to make as a "deal." But the U.S.-China economic divide is steeped in the two countries' broader strategic competition. This means there is more room for escalation, especially as Trump maintains the strong ideological conviction that tariffs are not just a hammer in negotiations, but also an essential tool for reducing trade deficits.