China purchases of US goods could undercut Trump's larger trade goal

(From left) US Trade Representative Robert Lighthizer, US Treasury Secretary Steven Mnuchin, Chinese Vice-Premier Liu He and People's Bank of China governor Yi Gang at Diaoyutai State Guesthouse in Beijing on March 29, 2019. PHOTO: REUTERS

WASHINGTON (NYTIMES) - At the heart of President Donald Trump's negotiations with China is a troubling contradiction: The United States wants to use the trade talks to encourage the country to adopt a more market-oriented economy.

But a key element of a prospective deal may end up reinforcing the economic power of the Chinese state.

Negotiators are still working out deal terms, but any agreement seems certain to involve China's promise to purchase hundreds of billions of dollars of American goods. For Mr Trump, this is an essential element that will help reduce the US' record trade deficit with China and bolster farmers and other constituencies hurt by his trade war.

But those purchases will be ordered by the Chinese state and most will be carried out by state-controlled Chinese businesses, further cementing Beijing's role in managing its economy and potentially making US industries even more beholden to the Chinese.

"It seems like those types of really simplistic purchasing commitment type of arrangements would actually reinforce state ownership rather than discourage it," said Mr Rufus Yerxa, head of the National Foreign Trade Council, which represents the US' largest exporters.

After months of talks, the two sides are inching closer to an agreement. Mr Robert Lighthizer, Mr Trump's top trade negotiator, and Mr Steven Mnuchin, the Treasury Secretary, discussed the remaining sticking points with their Chinese counterparts last Thursday (March 28) evening and Friday in Beijing.

Mr Mnuchin, in a tweet last Friday, said the talks had been constructive. Both sides are trying to iron out an agreement by this week, to coincide with a visit to Washington by Mr Liu He, the Chinese special envoy charged with negotiating the deal, who will begin meeting with his American counterparts on Wednesday.

The US and China had been looking to reach a tentative agreement by the end of Mr Liu's visit, with a signing ceremony between Mr Trump and President Xi Jinping of China potentially later this month.

But the two sides are still wrestling with two major sticking points: How an agreement will be monitored and enforced, and how many of Mr Trump's tariffs come off and when, said Mr Myron Brilliant, executive vice-president and head of international affairs at the US Chamber of Commerce.

Mr Brilliant said there was no question the US and China were "in the endgame with regard to a deal".

However, he said these factors were "complicating the fact that the agreement is 90 per cent done at this point".

To pave the way towards an agreement, China made several announcements that could benefit US companies.

Last week, Chinese regulators approved JPMorgan Chase's request to establish a majority owned and controlled securities brokerage firm in the country, a change that China had discussed since entering the World Trade Organisation two decades ago. Chinese officials have also floated the idea of an expanded trial that would allow foreign cloud computing companies to operate more freely.

On Sunday evening, China's finance ministry issued two statements saying that Beijing would continue to suspend tariffs it imposed last year on American cars and car parts in retaliation for Mr Trump's tariffs on US$250 billion (S$340 billion) worth of Chinese imports.

Those tariffs, which were suspended while the two sides tried to reach an agreement, were supposed to resume at the end of March, but China said it would extend the suspension indefinitely as a gesture of goodwill.

The finance ministry said: "We hope that the US and China will work together to step up consultations and make practical efforts towards the goal of ending trade friction."

While the two sides are closer to an agreement than at any point in the past, it remains unclear how successful the Trump administration will be in achieving its key goals. The President's trade war was initiated in large part to try to re-orient the Chinese economy and force it to become more open to American companies and investment.

Using punishing tariffs as leverage, the Trump administration has pressed China to roll back its heavy hand in the economy, including asking Beijing to curtail subsidies to state-owned firms and to end its practice of forcing foreign companies doing business in China to transfer their technology to Chinese competitors.

China has not readily committed to these goals, in part because such commitments are seen as infringing on China's sovereignty and undercutting the power of the Chinese state. What the Chinese have agreed to most readily is purchasing American goods, especially commodities that can fuel their economy.

While the final list could be different, the US and China have discussed the purchase of products including corn, soybeans, sorghum, natural gas, oil, coal, chemicals, semiconductors and airplanes, according to people with knowledge of the talks.

The Trump administration views these purchases as necessary to bolster the President's support across farming and manufacturing communities hard hit by the trade war and to help narrow the gap between what China sells to the US and what it buys. The administration has been working on various draft lists of what it wants China to purchase, according to people who have viewed them.

The final purchasing amount is not yet clear.

In December, Mr Mnuchin said that China had made an offer to buy more than US$1.2 trillion in American goods as part of the talks. But economists and China analysts have cautioned that such a large amount could be hard for the US to produce and export.

The US exported just US$120 billion of goods to China last year. With the American economy hovering near full employment, it lacks the productive capacity to raise exports by hundreds of billions of dollars in the short term. It could redirect some of the goods it sells to other countries to China instead, for instance diverting soybeans headed to Europe to China.

But a deal that would require China to buy even more from the US is raising concerns that China could expand its leverage over the US.

"If it can be negotiated by government fiat, it can be taken away by government fiat," said Mr Kevin Book, managing director at ClearView Energy Partners, an energy-focused research firm.

The deal could usher in a wave of new American exports if China agrees to open its markets more fully. Removing its requirements that American carmakers and financial services firms team up with a Chinese entity to do business in the country, for instance, could give those firms more ability to sell goods and services to China.

But in other industries, including agriculture, energy and aviation, purchases associated with a trade deal would be made directly by state-controlled entities. And while that would mean greater revenues for American companies, sceptics say it could also increase the leverage that China has over the US in the future.

"We are handing them the ability to coerce our companies," said Mr Derek Scissors, a resident scholar at the American Enterprise Institute.

Such a purchasing arrangement could also provoke challenges at the WTO, which bars its members from granting special advantages or privileges to any one country, as well as directing state enterprises to purchase goods from a specific country.

China has already demonstrated its ability to influence commodity purchases depending on the tenor of relations, analysts said. Once trade tensions flared, China drove its purchases of American oil to nearly zero last year, Mr Book said. After a breakthrough in talks this year, China ramped up its purchases of American soybeans.

"How easy would it be for the government of China to then turn off that tap when it gets into a dispute with the US?" Mr Yerxa asked.

Recent events have also raised a question over some components of the purchasing package under discussion. China had planned to buy Boeing 737 Max series planes. But the crash of a 737 Max in Ethiopia in early March, the second deadly crash of the new plane in less than five months, has thrown those plans into question.

Last week, China suspended the airworthiness certification for the model entirely, a move that Mr Richard Aboulafia, vice-president for analysis at the Teal Group, described as "pretty aggressive".

He said: "I think there's a very good chance that this is less about public safety and more about trade negotiation leverage."

It is also unclear how many purchases of semiconductors, the advanced components that power circuits in laptops, smartphones and other electronics, will ultimately be in the deal.

While China would like to buy more of the advanced technology, the Trump administration is concerned about allowing Beijing to gain an upper hand in the next generation of technology. The administration has pushed China to roll back its Made in China 2025 campaign, an industrial plan that pumps state money into building cutting-edge industries, like advanced manufacturing and aviation.

China had proposed last year to purchase US$200 billion of American semiconductors, according to people with knowledge of the deal. Beijing wanted to buy the semiconductors straight from fabrication lines at American factories and then do the necessary packaging and testing in China. The US rejected that idea. The two sides have since discussed a smaller number, but it is not clear now how many semiconductor purchases will ultimately be included in a deal.

The semiconductor industry has publicly warned that additional purchases could result in the Chinese government gaining more power to control where Chinese companies buy products. While that could result in Chinese companies buying more American components in the short term, they warn that Beijing could ultimately use such a system to redirect purchases to Chinese suppliers instead.

For now, administration officials are still trying to assure lawmakers that their trade deal will achieve the economic changes the US wants and will require much more than purchases.

When pressed by lawmakers in February about whether the deal would require more than just additional sales to China, Mr Lighthizer told Congress: "I do not think it should just be a purchase agreement."

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