Summary
A prospecting deal on the North American Free Trade Agreement (NAFTA) makes it more difficult for U.S. and China to resolve the ongoing trade battle for it provides the U.S. with more leverage in the negotiation. As the tensions with Mexico and Canada calms, the U.S. becomes more likely to form allies to oppose Chinese trade practices, and the agreement on NAFTA also soothes the criticism that the Trump administration has alienated too many countries for the trade deal. The Chinese officials and the opponents of trade battle have been expecting a settlement at two summits in November, namely the Asia-Pacific Economic Cooperation summit and the Group of 20 meeting, but since the White House holds a tougher stance on the trade issues, the likelihood of achieving a deal dampens.
The contrasting focuses of China and U.S. also hinder the negotiation. While China emphasis more on World Trade Organizations obligations and the “conceptual” idea for a deal, the U.S. side pursues more concrete offers. Furthermore, even if China promises to increase imports of U.S. goods, it is less likely to compromise on the structural changes in the Chinese economy, including technology exchanges and the free operation of U.S. cloud-computing companies. Chinese officials have indicated that at least a fifth of U.S. demands is not open to negotiation.
Meanwhile, the U.S. midterm suggests an opportunity. Some Chinese officials expect the potentially poor performance of Republicans in the election would weaken Trump’s negotiation power with China. The opponents of tariffs in the U.S., trade associations, in particular, are also seeking chances to persuade venerable Republicans. However, the U.S. politic mechanism may work otherwise, driving a wounded Trump presidency to push China harder. Let alone the unifying position on the U.S. side, which supports profound changes in the Chinese economy.
Chances Fade for U.S.-China Trade Deal
The prospect of resolving the U.S. trade battle with China is fading as the White House draws closer to a deal to revise the North American Free Trade Agreement.
The outcomes are related, U.S. officials say. Relaxing trade tensions with Mexico and Canada, plus a preliminary trade agreement with the European Union, have made it easier to forge a multilateral front to oppose Chinese trade practices. The U.S., EU and Japan have already held meetings on such a strategy.
A trade detente also blunts criticism from Congress and U.S. industry that the administration has erred by picking fights with friendly countries at the same time as it battles with China. Additionally, officials say, it helps recruit allies to stop Chinese exporters from skirting U.S. tariffs by shipping goods to third countries, which then send the goods to the U.S., say officials.
“We’re not prepared to make the deal that they’d like to make,” President Trump said this week, referring to the Chinese.
“Trump’s ultimate strategy is that we have leverage and we should be exploiting it,” said Stephen Moore, a Heritage Foundation economist who consults with administration officials.
The tougher White House stance makes it harder to try to reach a deal at two summits in November, which had been the game plan of Beijing and some in the administration. Last month, the White House said Mr. Trump would skip the Asia-Pacific Economic Cooperation summit in mid-November, leaving only the Group of 20 meeting at the end of that month.
The White House is getting ready to ratchet up pressure on China further by hitting as much as $200 billion in Chinese goods with tariffs of 25%, on top of the $50 billion of Chinese exports already facing 25% levies. The public comment period on the new tariffs ended Thursday, the last step before a decision. Trade associations, which oppose tariffs, were gearing up for an announcement as early as Friday.
But others familiar with the deliberations think that the Office of U.S. Trade Representative Robert Lighthizer will take weeks to make a move to demonstrate that it carefully considered the comments, numbering more than 4,000. The office took three weeks after the end of the first comment period to announce tariffs.
Several trade associations are considering suing the trade representative to stop the tariffs, by arguing the administration has exceeded its legal authority and has acted arbitrarily. “There has been concern about the scope of authority for the president to move forward” with the additional tariffs, said Stephen Kho, an Akin Gump attorney who was a trade official under George W. Bush.
For its part, Beijing is now pursuing a dual track, Chinese academics and officials say. On the one hand, Chinese officials have tried to reassure markets by stressing that the two sides have continued to talk since the end of last month’s unsuccessful trade negotiations in Washington.
On the other hand, few in Beijing expect much improvement before the U.S. midterms. That would leave very little time to conclude a deal in November, before the G-20 summit. Chinese officials believe that if Republicans fare poorly in the elections, the president will be weakened in talks with China.
“Mr. Trump is too busy right now with domestic politics,” said Yu Yongding, a member of the Chinese Economists 50 Forum, a think tank that advises Chinese policy makers. “China has the patience and can afford to let the bullets fly for a while.”
The Chinese may have little choice. The August trade talks revealed chasms between Washington and Beijing. Chinese negotiators focused on their efforts to live up to World Trade Organization obligations, say people briefed on the talks, and offered “conceptual” ideas for a deal. But Trump administration negotiators were looking for much more concrete offers.
Even in an administration divided on trade issues, the U.S. side this time was fairly unified, U.S. officials say. The U.S. position has shifted more toward the view of Mr. Lighthizer, who has been pressing for deep changes in the Chinese economy, including reduction of subsidies and other industrial policies favoring domestic firms.
Earlier negotiations had focused more on boosting Chinese imports of U.S. goods. Treasury officials had kept track of China’s purchase promises on a color-coded Excel spreadsheet.
But structural changes are the toughest for China to meet. Beijing denies that it pressures U.S. firms to hand over valuable technology to Chinese firms, as Washington alleges. Chinese officials cite political and national-security reasons for resisting other U.S. demands, such as allowing U.S. cloud-computing companies to operate more freely.
A fifth or more of U.S. demands aren’t open to negotiation, Chinese officials have indicated.
The administration and its allies think the Chinese are misreading U.S. politics. A wounded Trump presidency is even more likely to push China hard, egged on by Democrats, they say. The Chinese “think that to stop Trump’s confrontation with them he must be stopped at the ballot box,” said former White House strategist Steve Bannon, a China hawk. “They don’t get that he will be as unrelenting, regardless of the outcome.”
In the U.S., opponents of tariffs are looking at the midterms as a leverage point. Trade associations are preparing grass roots campaigns in opposition to tariffs, focusing on vulnerable Republicans. Recent NBC/Marist polls in Pennsylvania, Texas and Illinois say voters there think tariffs will hurt the economy.
Source: The Wall Street Journal, Bob Davis and Lingling Wei, Sep. 7, 2018. Photo credit to Mark Wilson/Getty; Naohiko Hatta/Getty; Shayanne Gal/Business Insider.