United States: US-China Trade Negotiations After G20

The United States and China are engaged in negotiations that have led to a temporary standstill in the ongoing tariff war, and that may lead to a de-escalation in the months ahead. To date, it is unclear what the United States seeks to obtain in such negotiations—and the bottom line for the United States may depend in part on exogenous factors, such as the state of the financial markets. It is also unclear to what extent China's leadership is willing or even able (from the standpoint of domestic politics) to undertake the more sensitive internal reforms demanded by the United States, such as removing preferences for state-owned enterprises, truly ending forced technology transfer, and fundamentally improving the protection of intellectual property (IP) rights across industries, or how such commitments could be reflected in a bilateral agreement in an enforceable and verifiable way. Thus, there is no guarantee of the extent to which the negotiations will be successful. Nonetheless, companies with an interest in US-China trade need to monitor the course of negotiations closely and seek to have their interests duly addressed.

On December 1, 2018, following the meeting between Presidents Trump and Xi on the sidelines of the G20 in Buenos Aires, the White House announced that the United States and China had reached an agreement to pause the trade war for 90 days (i.e., as the parties later acknowledged, until March 1, 2019). Specifically, according to the official White House statement, the parties agreed to the following:1

  • The United States will not raise existing tariffs from 10% to 25% on January 1, 2019, or impose tariffs on the remaining $267 billion of Chinese imports, as had previously been threatened.
  • China agreed to purchase "a not yet agreed upon, but very substantial, amount of agricultural, energy, industrial, and other product from the United States."
  • The United States and China agreed to "immediately begin negotiations on structural changes with respect to forced technology transfer, IP protection, non-tariff barriers, cyber intrusions and cyber theft, services and agriculture." The parties agreed to "endeavor" to complete negotiations within 90 days. If at the end of 90 days the parties are unable to reach an agreement, the United States stated that the existing tariffs will be raised from 10% to 25%.
  • China agreed to reconsider the Qualcomm/NXP acquisition, which Chinese merger review authorities had previously rejected—but Qualcomm quickly stated that the deal had already been abandoned, indicating an apparent lack of White House coordination with the business community.
  • In a move not directly related to trade, China agreed to designate fentanyl as a controlled substance, which would allow for China to impose the "maximum penalty under the law," according to the White House statement.

The statement concluded by quoting President Trump as stating: "This was an amazing and productive meeting with unlimited possibilities for both the United States and China. It is my great honor to be working with President Xi." Subsequently, China announced that it would send a 30-person delegation to negotiate with the United States, led by Liu He, President Xi's top economic advisor. This visit is expected to take place in early January. The G20 meeting followed China's submission of a written response to earlier US demands for action, with the list divided into actions that China is prepared to take, those that it is prepared to negotiate, and those that it refuses to make on the grounds of China's expansive definition of national security or otherwise. In addition, on December 5, China confirmed that it shares the US understanding of the agreement reached at the G20 meeting, with an unnamed Chinese official stating that there are "clear timelines and road map."2,3

China has already taken steps to boost the talks. On December 11, China agreed to reduce tariffs on US automobiles from 40% (an elevated level to retaliate for unilateral US tariffs) to 15%. Initial Chinese purchases of US agricultural products have resumed, and it is in China's interest to diversify its sources of supply for raw materials. Indeed, global prices of a range of raw materials have been increasing as a result of the US-China trade troubles, and China thus has a broader incentive to reduce tensions and the resulting price pressure in this regard.

China has already made two positive announcements relating to IP, a major concern of the United States as well, although these do little to resolve some of the more fundamental challenges that continue to exist. On December 4, China released a document announcing an array of punishments for patent infringement, including restrictions on access to loans and government funding.4 The document, a 58-page multi-agency, multi-Party Central Committee department circular, was issued principally under the imprimatur of the National Development and Reform Commission and People's Bank of China. It was dated November 21 (10 days before the G20 meeting) and would have been in preparation long before. The document does not address trade secrets, which are an issue of great concern to the American business community and government concerned about China's technology policies. Thus, the document—while significant in and of itself—appears to be a preapproved change to China's IP policies, whose release was timed to provide encouragement to the US-China negotiations.

Similarly, the draft amendments to the Patent Law were approved by the State Council on December 5 for submission to the National People's Congress for deliberation. The draft focuses on stepping up efforts to punish IP infringement by learning from international practice and substantially increasing compensation and fines for intentional infringement and counterfeiting of patents, raising the cost of infringement to deter illegal conduct.5

Apart from possibly sending a signal that China is willing to consider changes to its policies and being an effort to decrease tensions, these two policy developments should primarily be seen as a result of a shift in China's own domestic priorities and policy references, which have increasingly moved toward greater recognition among Chinese authorities that stronger patent protection is consistent with China's own drive to promote innovation and develop a modern, technology-driven economy.

Despite these positive developments, moreover, there are several things that may disrupt negotiations as well, or that could make it harder for negotiations to lead to meaningful results. One such factor is the arrest of Meng Wanzhou, a top Huawei executive and daughter of the company's founder, on December 1 (the same day as the G20 summit) in Canada at the behest of US authorities, for alleged violations of US sanctions against Iran. The United States has stated that the arrest is a law enforcement issue unrelated to trade matters. The United States and China have thus far managed to keep the issue contained, at least in public. The director of the US National Economic Council denied that President Trump knew in advance of the arrest. In addition, Chinese internet censors have reportedly been censoring online posts that are too critical of the United States in relation to the arrest. Thus, both governments seem to be trying to keep the arrest separate from trade issues. However, public pressure in China appears to be leading to harsher official criticism of both Canada and the United States, with the arrest of Ms. Meng portrayed as part of a larger effort to constrain China's technological and economic advancement. A decline in support for the United States among China's business community as well as the public could further aggravate bilateral friction over the long term. Meanwhile, apparent Chinese retaliation by detaining and investigating two Canadian citizens on dubious charges of endangering China's national security is likely to reduce foreign confidence in the Chinese investment environment.

Beyond these more short-term issues that in some ways are simply becoming part of the negotiating tactics and leverage that both sides are building, a range of longer-term and more fundamental problems will equally remain. One of these, and perhaps the most challenging, is the difficulty of fundamentally resolving and "fixing" some of the more substantial issues with China's economy that the Trump Administration has raised. This includes such crucial issues as how to create a more level competitive playing field and fair competition with Chinese state-owned and formally private but state-influenced enterprises, and, within the Chinese state-led economy more generally, finding longer-term solutions to some of the subsidy, technology transfer and IP challenges that US and other foreign companies are facing in China. Another challenge is Chinese government support—which can often take a range of forms—for key "strategic" industries, including those highlighted in China's now downplayed Made in China 2025 strategy.

In addition to the bilateral discussions, several other initiatives are already underway to try to address these issues as well, including at the World Trade Organization, and in trilateral meetings between the United States, European Union and Japan, but the fundamental nature of the issues means that a true longer-term solution will likely require a range of actions and activities for many years to come.

We are continuing to monitor the progress of US-China trade negotiations as well as the other issues highlighted above. Attention is particularly focused on statements that may be made in conjunction with the 40th anniversary of the start of China's economic reforms on December 18.

Footnotes

  1. https://www.whitehouse.gov/briefings-statements/statement-press-secretary-regarding-presidents-working-dinner-china/
  2. http://www.mofcom.gov.cn/article/ae/ag/201812/20181202813512.shtml
  3. http://www.mofcom.gov.cn/xwfbh/20181206.shtml
  4. http://www.ndrc.gov.cn/gzdt/201812/t20181204_922114.html
  5. http://www.sipo.gov.cn/zscqgz/1134384.htm

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