China pulls punches in US trade negotations as deal looks elusive

In a move that would meet some US demands, the Commerce Ministry is studying measures to further lower import tariffs on some food, pharmaceuticals and medical instruments. PHOTO: REUTERS

BEIJING (BLOOMBERG) - With Mr Donald Trump's team of trade negotiators having come and gone with no public signs of a deal, China tried to strike a positive tone while reiterating that the US shouldn't make unreasonable demands.

State media over the weekend offered a somewhat positive assessment of the US trade talks, urging more negotiations while saying the Americans should be "rational and pragmatic".

And in a move that would meet some US demands, the Commerce Ministry is studying measures to further lower import tariffs on some food, pharmaceuticals and medical instruments, Economic Information Daily reported on Monday (May 7), citing unidentified people.

"In the next couple of months, we expect continued negotiations will likely result in a scale-back of the current proposal on tariffs as China quickens its implementation of some announced opening and reform measures," UBS Group AG chief China economist Wang Tao said in a note.

"As a result, we expect any direct impact on exports and economic growth from higher tariffs will be limited."

Two days of discussions ended on Friday in Beijing with an agreement to keep on talking but little else, leaving the US threat of tariffs on as much as US$150 billion (S$200.36 billion) of Chinese imports still in play.

The list of demands from each side, seen by Bloomberg News, showed just how wide the gulf between the world's two biggest economies remains.

The US wants China to cut its annual trade surplus by US$200 billion by the end of 2020 and not retaliate against US tariffs.

It also wants a halt to subsidies and other government support for its "Made in China 2025" plan that targets global domination in strategic industries from robotics to new-energy vehicles.

China's demands included asking the US to stop an investigation into the country's acquisition of sensitive American technologies, adjust an export ban on ZTE Corp, and lift bans on exports of integrated circuits to China.

The US approach was "all stick, no carrot", said Mr Stephen Roach, author of the 2014 book Unbalanced: The Codependency of America and China and former chairman of Morgan Stanley Asia.

"America threatens from a position of weakness and strategic miscalculation that can only backfire," said Mr Roach, now a senior fellow at Yale University.

The "softening tone" at the talks is welcome as it gives room for further discussions to find common ground, the state-run China Daily newspaper said in an editorial on Friday.

But it rebuffed the US call to quickly slash its trade surplus, saying it can only be reduced gradually, not through "unilateral, ill-thought-through trade actions," it said.

"Making China a scapegoat for the ills of the US economy may appease some uninformed voters, but it would hardly reduce the trade deficit," it said. "China will further open up its economy so the international community can benefit from its large and fast-developing market. But China will do so on its own conditions, not to suit the agenda of other countries."

UBS' Wang said she doesn't expect all core trade differences to be resolved, meaning lingering tension and uncertainty will likely weigh on China's export orders and related business investment.

If that slowdown is notable, she expects the current credit tightening policies, especially those related to infrastructure investment, may be relaxed or reversed.

One of the Trump administration's biggest fears is that China swamps industries from artificial intelligence to aircraft manufacturing in the same way it did steel and aluminium previously, shutting the US out of sectors in which it now holds an advantage, former Reserve Bank of India Governor Raghuram Rajan said in a Bloomberg Television interview.

"I'm not saying there's no reason for concern in industrial countries, but I think there are ways of making this work much better," said Mr Rajan, now a professor at the University of Chicago. "It shouldn't be driven primarily by a fear of China. It's going to be hard for China to stay at the frontier of these areas. There is room for a win-win discussion."

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