US eases demands on China in push for trade deal

Washington resigned to securing less than it would like on getting Beijing to curb industrial subsidies: Sources

WASHINGTON/BEIJING • US negotiators have tempered demands that China curb industrial subsidies as a condition for a trade deal after strong resistance from Beijing, according to two sources briefed on discussions, marking a retreat from a core US objective for the trade talks.

The world's two biggest economies are nine months into a trade war that has cost billions of dollars, roiled financial markets and upended supply chains.

United States President Donald Trump's administration has slapped tariffs on US$250 billion (S$338 billion) worth of imports of Chinese goods to press demands for an end to policies - including industrial subsidies - that Washington says hurt US companies competing with Chinese firms.

China responded with its own tit-for-tat tariffs on US goods.

The issue of industrial subsidies is thorny because they are intertwined with the Chinese government's industrial policy.

Beijing grants subsidies and tax breaks to state-owned firms and to sectors seen as strategic for long-term development. Chinese President Xi Jinping has strengthened the state's role in parts of the economy.

In the push to secure a deal in the next month or so, US negotiators have become resigned to securing less than they would like on curbing those subsidies, and are focused instead on other areas where they consider demands more achievable, the sources said.

Those include ending forced technology transfers, improving intellectual property protection and widening access to China's markets, the sources said. China has already given ground on those issues.

DEFINING SUCCESS

If US negotiators define success as changing the way China's economy operates, that will never happen. A deal that makes Xi look weak is not a worthwhile deal for Xi. Whatever deal we get, it's going to be better than what we've had, and it's not going to be sufficient for some people. But that's politics.

A SOURCE WITH KNOWLEDGE OF THE TRADE TALKS, referring to Chinese President Xi Jinping.

"It's not that there won't be some language on it, but it is not going to be very detailed or specific," one source familiar with the talks said in reference to the subsidies issue.

"If US negotiators define success as changing the way China's economy operates, that will never happen," said the other source with knowledge of the trade talks.

"A deal that makes Xi look weak is not a worthwhile deal for Xi. Whatever deal we get, it's going to be better than what we've had, and it's not going to be sufficient for some people. But that's politics," that source said.

China pledged earlier this year to end market-distorting subsidies for its domestic industries but offered no details on how it would achieve that goal, three people familiar with the trade talks told Reuters in February.

One of the key sticking points in the negotiations is the removal of the US$250 billion in US tariffs.

It is broadly expected in the trade community that US negotiators want to keep some tariffs on Chinese goods, which Washington sees as retaliation for the years of damage done to its economy by Beijing's unfair trade practices.

The role of the state firms may benefit the US in another part of the trade deal. The Trump administration wants China to make big-ticket purchases of over US$1 trillion worth of US goods in the next six years to reduce its trade surplus.

The companies likely to make the purchases are the state-run firms, both sources said.

Another point of contention between the two countries, telecommunications, may drive China to increase the state's role rather than reduce it, the source said.

Pressure from the United States on allies to reduce cooperation with Chinese telecoms champions such as Huawei could push the government into raising state support to develop technology at home.

Subsidies and tax breaks have been a source of friction between the two countries for years.

Washington says Beijing has failed to comply with its World Trade Organisation (WTO) obligations on subsidies that affect both imports and exports.

China has taken steps to address some US concerns in cases brought before the WTO.

It has also begun to publicly downplay its push to dominate the future of high-tech industries under its "Made in China 2025" policy, although few expect it to jettison those ambitions.

REUTERS

A version of this article appeared in the print edition of The Straits Times on April 16, 2019, with the headline 'US eases demands on China in push for trade deal'. Print Edition | Subscribe