Burned once by Trump, China's Xi wary about fresh trade talks

Washington

THE last time that the US and China engaged in serious trade negotiations, President Xi Jinping's top economic aide got burned.

Following intense talks in Washington this May, Vice-Premier Liu He declared that a trade war had been avoided after China agreed to "significantly increase purchases" of US goods. In interviews with Chinese media, Mr Liu said US President Donald Trump showed him respect as Mr Xi's special representative, and that he had "a very strong feeling" that Mr Trump wanted good relations with Beijing.

But just days later, Mr Trump said that the US would slap tariffs on as much as US$50 billion of Chinese imports, a precursor to further escalations. The move torpedoed any progress, and was an embarrassment for Mr Liu.

Now, as both sides hint at the possibility of restarting talks, China is worried that it might get played again, according to three Chinese officials who asked not to be identified discussing strategy. Mr Xi's administration still wants to cut a deal with the US and is open to talks, but it will be hard for Chinese negotiators to trust their American counterparts, the sources said.

China's hesitation shows the difficulty in deescalating trade tensions between the world's two largest economies, a spat that has increased risks to global growth. It also reflects the high stakes for Mr Xi, who has faced rare rumblings of discontent for his administration's handling of the trade spat after he was elevated to become China's most powerful leader in decades.

"If another deal is rejected it would also reflect badly on Xi," said Ether Yin, a partner at advisory firm Trivium China in Beijing. "Negotiations are about who has the upper hand. If you've been rejected once and then you approach the other party again, it makes you look weak."

In consolidating his rule over the past year, Mr Xi laid out a decades-long vision to bolster the Communist Party's strength at home and turn China into a leading global power abroad. Now, Chinese academics, economists and some officials have begun to question whether the leadership could have done more to avoid a confrontation that may hurt the economy.

Mr Trump has threatened to put tariffs on all Chinese imports to the US, and accused China of weakening its currency to gain an advantage on trade. On top of that, China's stock market is the world's worst performer this year among major indexes, and an infant vaccine scandal has shocked the nation, making the challenges facing Mr Xi's government all the more daunting.

"Some people are blaming the backlash against China in all the advanced industrial countries on Xi's over-reaching both in foreign policy and domestic politics," said Susan Shirk, a former deputy assistant Secretary of State for East Asia who was in Beijing recently for meetings. "They are calling for greater moderation and restraint."

As the impasse drags on, China has experimented with new messages and tactics in a bid to ease tensions, including reaching out to US allies and toning down its rhetoric. In doing so, it has stuck to the red lines that it stated previously, including that subsidies for key sectors such as artificial intelligence and robotics - a key part of its Made in China 2025 policy - are not up for negotiation.

In early rounds of talks with the Trump administration, China focused on reducing the US's trade deficit, a favourite topic of the American president. Officials in Beijing now recognise that this approach was too narrow, according to two of the sources.

One area where they see a possible compromise is regarding intellectual property rights, according to one official. The US has justified tariffs in part based on a Section 301 investigation released earlier this year that accused China of stealing American intellectual property in an effort to dominate the development of advanced technology.

"The narrative is that China has been stealing tech from the West, and poses a strategic threat," said Mr Yin from Trivium. "That's a charge that China must counterbalance, otherwise China will be viewed as a disruptor of international commerce."

Chinese Premier Li Keqiang made a point of addressing concerns about intellectual property in China during a session with European business leaders on July 16.

"I want to hear if any big company here would like to make a complaint here on the theft of intellectual property, so that I will take great measures," he told a BMW executive. Even after the executive told Mr Li that his biggest concern was not intellectual property, the premier persisted in saying how seriously the government takes the issue. BLOOMBERG