US-China trade talks resume with low expectations of breakthrough

US-China trade talks resume with low expectations of breakthrough

US-China trade talks resume on Tuesday in Shanghai amid low expectations for a breakthrough to end the year-long spat between the world’s two largest economic powers.

The meeting between US trade representative Robert Lighthizer, Treasury secretary Steven Mnuchin and their Chinese counterpart, vice-premier Liu He, was organised after presidents Donald Trump and Xi Jinping agreed to a trade war truce at the G20 meeting in Osaka only a month ago.

Optimism has been dented since then. Mr Trump warned last week that there might be no deal before the next US presidential elections in November 2020.

Mr Trump on Friday attacked China’s claims to developing economy status at the World Trade Organization, saying it was among a group of nations that are “cheating the system at the expense of the USA”.

China’s foreign ministry retorted that the Trump administration’s criticism “further exposed its wayward arrogance and selfishness”.

On Monday, Mr Trump lashed out at both China and the EU for their loose monetary policy, amid his latest attack on the US Federal Reserve. 

Expectations for a big breakthrough are “modest”, said Jake Parker, head of the US-China Business Council’s Beijing office. “We hope both sides will take a pragmatic and realistic approach to compromise.”

However, pressure is growing on Mr Trump from Capitol Hill not to “sell out” to Beijing. “This is a game of who is stronger and who can last longer — I hope it’s us,” Chuck Schumer, the top Democrat in the Senate, said on the floor of the upper house.

Mr Schumer added that the Trump administration should “not give up leverage on Huawei in exchange for anything less than concrete commitments on market access, intellectual property theft and forced technology transfers”.

Rather than a final deal, outcomes this time could include an agreement on what issues to tackle, and some agricultural purchases by Chinese companies, Mr Parker said.

“Hopefully we’ll go back to where we were in May. And we, very much on the American side, want China to begin buying agriculture goods and products as they promised,” Larry Kudlow, the director of Mr Trump’s National Economic Council, told Fox Business Network on Friday. 

Both sides could agree to return to a document cobbled together this spring as a basis to proceed, said Chris Krueger of financial services company Cowen Group. “The real deal breaker, as became clear with the collapse of talks in May, is how the agreement should be enforced,” he wrote.

Despite the subdued expectations for substantive movements in the Shanghai talks, which conclude on Wednesday, there have been signs of movement from both sides since Mr Trump met Mr Xi in Osaka.

Choosing Shanghai for the trade talks signals a willingness to reach a deal by the Chinese side. Twelve years ago, China’s then-commerce minister Bo Xilai met in Shanghai with Peter Mandelson, then EU trade commissioner, to seal a deal that temporarily curbed a “surge” of Chinese textile exports to the EU.

Earlier in July, the US has lifted its additional tariffs on 110 Chinese-made industrial goods, following appeals by American companies. Most of the lifted tariffs apply to engines, motors and equipment parts, as well as medical devices.

There has also been some movement on granting licences for companies partnering with Chinese telecoms equipment maker Huawei.

Meanwhile, Chinese companies resumed buying US soyabeans, cotton, pork and sorghum on July 19, China’s state-run Xinhua news agency said, adding that it would continue to do so if prices are appropriate. Agricultural purchases by Chinese companies had slackened after a deal to end the trade war fell apart in early May.

Any attempt by US negotiators to pin down grain purchase commitments is complicated by the fact that Chinese agricultural imports are unlikely to return to previous levels. The country is still digesting a massive build-up in state grain stockpiles in the years before 2016, which raised Chinese prices well above global prices and artificially inflated import demand. 

In the short-term, Chinese demand is further weakened by an epidemic of African swine fever that has decimated the country’s pig herd, reducing demand for feed.

The drop in Chinese grains purchases as it unwound its excess state grains reserves contributed to the wave of anti-China feeling that swept the US around the time of Mr Trump’s election. That has given soyabeans centre stage in the talks, even though most of the White House’s tariffs are designed to counter industrial offshoring.

Chinese grains importers are wary of the consequences of setting minimum grains purchase volumes as part of any trade deal. They worry that could leave them forced to purchase American grains at inflated prices.

Additional reporting by Xinning Liu and Archie Zhang in Beijing

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