U.S. Makes Tariff-Cut Offer to China as Tariff Deadline Nears

Date: Thursday, December 12, 2019
Source: The Wall Street Journal

Negotiators want Beijing to boost purchases, provide greater access to China’s financial-services sector—or no deal

BEIJING—U.S. negotiators have offered to slash existing tariffs by as much as half on roughly $360 billion of Chinese-made goods as well as to cancel a new round of levies set to take effect Sunday, according to people briefed on the matter, as the two sides work toward a limited trade deal that could help prevent their shaky relationship from worsening.

President Trump wrote in a tweet on Thursday morning: “Getting VERY close to a BIG DEAL with China. They want it and so do we!”

The offer to reduce tariffs was made in roughly the past five days, the people said, and in exchange, the U.S. side has demanded Beijing make firm commitments to purchase large quantities of U.S. agricultural and other products, better protect U.S. intellectual-property rights and widen access to China’s financial-services sector.

Should China not carry out its pledges as part of the potential deal, the tariff rates would return to their original levels, a clause known in trade talks as a “snapback” provision.

Negotiations are grinding on. During several rounds since October, Chinese negotiators have balked at Washington’s request that Beijing guarantee its pledge to buy more U.S. soybeans, poultry and other products, saying doing so would violate World Trade Organization rules.

“Trade teams from both sides are maintaining close communications,” Gao Feng, spokesman at China’s Commerce Ministry, said at a news briefing Thursday, without elaborating.

Details of the new U.S. plan emerged as the clock runs out for the two sides to reach an agreement before 12:01 a.m. Sunday—the date Mr. Trump has set for tariffs to increase on an additional $156 billion of Chinese goods. Officials in Beijing and Washington have indicated that negotiations could be extended beyond that date, as has happened several times when the two sides believed they were close to a deal. None of the trade truces declared in the past two years have stuck, however, and uncertainty around trade between the world’s two largest economies has weighed on global growth.

Mr. Trump hasn’t unveiled a decision on whether or not to delay the scheduled new tariffs, or whether to accept a rate cut on existing tariffs. The new tariffs set for Dec. 15 would hit imports from China of mobile phones, laptops, toys, clothing and other consumer products.

Wary of what they regard as Beijing’s poor record of following through on its pledges, U.S. negotiators led by Trade Representative Robert Lighthizer have asked China to commit in writing to some agricultural purchases up front and to agree to a detailed timeline for future purchases. The U.S. has also been pressing China to commit in the text of the deal to a quarterly review of promised purchases and specify that the purchase amount wouldn’t drop by 10% in any given quarter.

The U.S. has imposed tariffs on Chinese goods in phases over the past two years. The U.S. currently imposes 25% tariffs on about $250 billion of Chinese goods and 15% tariffs on an additional roughly $111 billion. Those rates would be slashed by as much as half under the terms of Washington’s latest offer but would return to their original levels if China fails to deliver on its promised purchases.

Chinese negotiators have been reluctant to meet U.S. demands during recent discussions. They worry that guaranteed purchases would cause friction with China’s other trading partners. In addition, Chinese officials have argued that the purchases should be based on market prices and organic demand from Chinese companies. For example, Brazil is offering soybeans at lower prices than the U.S., and buying from the U.S. at higher prices would disadvantage Chinese buyers.

Mr. Trump will meet with his top economic officials on Thursday afternoon to discuss China trade, the White House said. According to an administration official, the meeting is expected to include Mr. Lighthizer, senior trade adviser Peter Navarro, White House economic adviser Larry Kudlow, Treasury Secretary Steven Mnuchin and Vice President Mike Pence.

Mr. Kudlow said at a meeting of The Wall Street Journal’s CEO Council earlier this week that the Dec. 15 tariffs “are still on the table” if the president isn’t happy with the progress of trade talks, though he has also suggested that there isn’t a drop-dead date for making a call on the planned tariff increase.

The new tariff-reduction offer is designed to enable Washington to retain some of its leverage over Beijing, even while extending it an olive branch. If a near-term deal were reached and the U.S. reduced its tariff rates across the board, for example, some levies would still remain in place and could be used to push Beijing to carry out its promises and continue discussions.

But a deal along these lines is bound to draw criticism in the U.S. as ceding too much leverage. Reduced tariffs of 7.5% or 12.5% are much easier for exporters and importers to handle and might not be enough to compel Beijing to change core policies of its economic model.

Many of the toughest issues are still to be resolved. They include China’s subsidies to domestic firms, restrictions on foreign access to fast-growing sectors like cloud computing and an end to Chinese pressure on U.S. firms to transfer technology to their Chinese partners.

Both Xi Jinping, China’s president, and Mr. Trump could frame such a near-term deal as a win.

Mr. Trump would be able to argue that he secured a guarantee of large-scale purchases from Beijing while keeping the tariff pressure on China.

Mr. Xi, meantime, would be able to point to a slashing of existing tariffs, which would serve as a much-needed boost to the slowing Chinese economy. The trade war with the U.S. has caused China’s exports to the U.S. to tumble and businesses to delay investments.

During recent talks, Chinese negotiators led by Vice Premier Liu He have asked their counterparts not only to cancel the planned December tariffs but also to roll back existing levies—a demand the U.S. had resisted until recently.

“The ball is in China’s court now,” said one of the people briefed on the U.S. offer.

Having what is widely regarded as a balanced agreement remains a priority for the Chinese negotiators and for the country’s leadership. Beijing walked away from a nearly completed deal in early May because it felt that the text of the agreement was too lopsided in Washington’s favor. That led the Trump administration to ramp up its trade offensive against China, which then hit back, exacerbating a cycle of mutual retaliation.

Having consolidated power considerably in recent years, Mr. Xi has largely staked his credibility as China’s most powerful leader in a generation on his image as someone willing and able to stand up to foreign pressure.

In recent weeks, tensions have continued to rise between Washington and Beijing, triggered by two bills in the U.S. Congress supporting human rights in Hong Kong and Xinjiang. Aggressive media coverage in China targeting the U.S. is further fanning nationalist sentiment on the mainland, making officials ever more sensitive about even the appearance of caving to American pressure.

“China’s domestic political exigencies make it difficult for its leadership to accept a deal that is asymmetric,” said Eswar Prasad, an economics professor at Cornell University and former senior China official at the International Monetary Fund, who was in Beijing early this week meeting with policy makers.

Trade negotiations between the two sides have been stop-and-go since the summer. Talks accelerated again in October, when Mr. Trump announced a new truce with China, with the near-term goal of reaching what he termed a “phase-one” deal.

Discussions have so far centered on getting China to commit to annual purchases of between $40 billion and $50 billion of U.S. farm products. U.S. officials are also pressing China to buy more U.S. energy and manufactured products. In addition to the other matters being negotiated, Beijing has also agreed not to engage in competitive currency devaluation to help Chinese exporters, though it has made similar promises as part of some multilateral pacts in the past.

If completed, the deal would cover only a small portion of the U.S. complaints against China’s trade practices, leaving largely untouched fundamental issues including subsidies and Chinese pressure on American firms to share technology. Those matters would be left for future negotiations, though many in the U.S. business community remain skeptical that such discussions will bear fruit.

 

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