The U.S. and China Will Resume Talks Amid Ongoing Trade War

U.S. officials and some outside experts say they expect this week’s meeting between President Trump and Chinese President Xi Jinping to head off an escalating trade war and restart trade negotiations between the world’s two largest economic powers.

The two leaders are scheduled to meet on the sidelines of the June 28 and 29 G20 economic summit in Osaka, Japan, amid signs that both sides are eager to forestall an escalating round of tariffs that is pushing China deeper into debt and prompting U.S. business and political leaders to oppose additional tariffs on imports from China.

One sign that the Trump Administration wants to give economic peace a chance is the fact that Treasury Secretary Steven Mnuchin, who is set to attend the Trump-Xi meeting, is holding up a final decision on selling advanced U.S. tanks and other military equipment to Taiwan, said a U.S. defense official who spoke on the condition of anonymity.

The Defense Department has notified Congress of the proposed $2 billion sale of M1A2 heavy tanks and anti-air and anti-tank missiles. But the administration has yet to act on the move, which would anger Beijing in the midst of an effort to restart trade negotiations.

“We are firmly against U.S. arms sales to Taiwan,” Chinese Foreign Ministry spokesman Geng Shuang told reporters on June 4. “We urge the U.S. to see the high sensitivity and severe harm of arms sales to Taiwan.”

Another signal of the Administration’s reluctance to anger Beijing right now is its muted response to the massive protests in Hong Kong to a bill that would allow China to extradite the territory’s residents. The bill has now been suspended.

Some U.S. lawmakers reintroduced a bill defending Hong Kong’s autonomy on June 14, but the Administration so far has not picked up the issue.

In addition, U.S. Special Trade Representative Robert Lighthizer, a trade hawk, sounded a slightly more moderate tone on Capitol Hill this week, saying, “It’s certainly in the interest of both China and the United States to have some kind of successful agreement. The President has said he definitely wants an agreement if we can get a great agreement for America.”

However, any agreement is likely to be more modest than what the Administration initially demanded, which included a rewrite of some Chinese laws that require businesses operating or investing in China to share intellectual property and Chinese companies to cooperate with the nation’s intelligence services.

When Chinese officials balked at that, Trump responded by raising tariffs on Chinese goods worth some $250 billion and threatened to impose tariffs on another $300 billion worth of Chinese exports, including cell phones, computers, toys, and clothing, if China didn’t agree to the U.S. demands.

Since then, however, said U.S. trade officials and outside experts, the temperature seems to have dropped as both countries have faced the likely consequences of an escalating trade war.

One expert, Kevin Nealer of the Scowcroft Group, an international consulting firm founded by Brent Scowcroft, President George H.W. Bush’s national security advisor, says the most likely outcome of the summit is an agreement to restart talks.

However, Nealer and China expert Zack Cooper of the American Enterprise Institute, expect the Administration to quietly drop its demand that China bow to U.S. demands that it rewrite its laws or face more tariffs, although the Administration is unlikely to say that publicly.

“My expectation is that we’ve passed the window for a major deal on structural issues and will instead get a narrow agreement focused on reducing the trade deficit,” Cooper said in an email.

A narrower deal to head off a trade war is likely to include a Chinese agreement to reduce its trade surplus with the U.S. by buying more American farm products such as soybeans and beef, as well as manufactured goods.

Rather than sticking with the demand that China rewrite some of its laws and threatening more tariffs, the Administration is exploring other ways to curb what it says is China’s rampant theft of intellectual property, state subsidies, restrictions on market access, and other unfair trade practices.

Instead of imposing tariffs on entire product categories, for example, some U.S. officials are considering whether slapping sanctions on individual companies that violate an agreement could achieve many of the same ends.

National Security Adviser John Bolton has been studying such an approach, according to two people familiar with the effort. One, an Administration official, said the approach could have more international support than imposing more broad tariffs would.

Both China and the U.S. now have incentives to strike even a modest agreement rather than continue an escalating economic battle.

The Administration’s trade hawks are facing growing opposition from business leaders as the 2020 elections approach. This week, more than 300 representatives of U.S. companies and trade associations warned that adding more tariffs on imports from China won’t produce a stronger trade deal and will harm U.S. consumers and the economy.

It’s no secret that Trump pays close attention to the stock market, and this week his top economic adviser, Larry Kudlow, told reporters: “You look at the rally, the stock market, I think the market says talk is better than no talk.”

“There are better alternatives to address China’s policies and practices that would not have the same adverse impacts on U.S. consumers, businesses, and local communities,” the U.S. Chamber of Commerce argued in comments filed with the Administration.

China, too, has reasons to play “let’s make a deal.” According to a June 19 blog post by Benn Steil and Benjamin Della Rocca of the Council on Foreign Relations, “the value added by foreign-owned firms in China has plunged since the trade war began one year ago, with trade fears pushing companies to shift production abroad”, and as a result private spending in China is contracting.

Beijing is counteracting the fall by pushing more domestic borrowing and restricting foreign lending, they continued. China’s national debt is now equivalent to 254 percent of the country’s gross domestic product, which means the country is “edging closer to debt crisis”, they said.

Correction, June 24:

The original version of this story misstated the status of a bill that would allow China to extradite residents of Hong Kong. The bill has been suspended, not withdrawn.