President Trump has tweeted the high-level status of the negotiation restart. Essentially the outcome is as we expected.
- Trade talks resume from former stalled point. [Likely Vice-Premier Liu He is back representing Chairman Xi Jinping – Beijing retreat]
- Current enhanced tariff’s remain in place. [The tariffs that were raised when talks collapsed will remain raised and in force. – Beijing retreat]
- China resumes AG purchases. [Likely soy beans will be priority – Beijing retreat]
- U.S. will allow trade purchases, exports, to Huawei of non-National Security tech. [Ross likely to determine products – Trump modifies position]
From this summation it would appear President Trump has created an exit ramp for Chairman Xi Jinping that allows him to save face. However, obviously with retention of the recent tariff increases the benefits beyond optics all favor President Trump.
We are assuming the high visibility of Vice-Premier Liu He at the G20; and the fact that Liu He was directly engaged with U.S.T.R. Robert Lighthizer and U.S. Treasury Secretary Steven Mnuchin during the G20 sideline meetings; to mean the prior negotiated place of agreement is the starting point for renewed talks.
If the assumption is accurate, this indicates a significant retreat by Beijing.
If Beijing was not going to accept the closed chapters of the prior negotiation; a position they previously rebuked; then there would be no starting point between the Chinese and U.S. teams. We don’t like to make too many assumptions, but common sense would indicate the agreements between all parties, prior to the collapse, is now the agreed starting point.
If accurate (obviously details to be identified later) this would indicate that the hawks in Beijing, those who formerly balked, have now retreated from their antagonistic position toward the agreement negotiated by Liu He.
It is likely they saw growing ramifications and consequences over the past 30+ days. In essence, after getting a taste of what was coming, Beijing saw a cycle of continual collapse as their future; they had no option but to try and stop the downward spiral.
This internal outlook, overlaying their historic zero-sum perspective, would make sense given the latest developments; party because the reality of an increasingly losing position was their new baseline. A cessation of further damage was their best scenario.
Summary: Trump forced Beijing to see less-loss as the better loss.
However, as noted in the attitude of President Trump, he retains the larger tariff level despite China’s re-engagement. Trump has allowed the restart itself to be the face-saving Xi needed, yet he retains the prior tariff gains. Team Trump yielded nothing back.
Do not take this dynamic lightly. China has never negotiated for, nor accepted, less-lossbefore. Understanding this is new ground for them we can only imagine the anxiety within internal discussions. Vice-Premier Liu He cannot turn to the Beijing Hawks and say: ‘I told you so’. He can only start again and hope the same outcome does not repeat.
Both teams know the prior closed chapters were negotiated in good faith by Liu He, Robert Lightizer and Mnuchin. It wasn’t the U.S. who walked away from prior commitments. Therefore it makes additional sense for Chairman Xi to offer the Ag purchases as a show of good faith; and, in turn, President Trump gives the optics of compromise on high-tech.
Returning to the original point of collapse, the stickler point was/is the enforcement mechanism if China cheats. This is where Lighthizer had built sector-by-sector, product-by-product, escalating and countervailing tariffs into the compliance chapters.
Unlike traditional trade agreements with one enforcement chapter that encompasses all of the sectors within the aggregate agreement, Bob Lighthizer built specific enforcement mechanisms into each sector. Essentially, each product had it’s own compliance requirements unique to the sector of trade.
That multi-layered compliance is where China recoiled because they saw the U.S. as having ultimate decision-making about whether the rules were being followed. However, that construct was/is the unidirectional price Lighthizer was applying due to the history of Chinese duplicity and cheating.
Any U.S. company (or U.S. entity) harmed by Chinese trade practices (ie. ‘cheating‘, ‘theft’, ‘coercion’, etc.) would have a set of enforcement provisions to protect their interests specific to their unique sector inside the agreement. The scale of this approach is rather overwhelming to consider; however, as Lighthizer told congress this is the only way to insure compliance and protect very diverse U.S. trade interests.
You have to write the agreement while predicting the other party will attempt to lie, cheat and steal; and they will do so with the sanctioning of the communist government.
Lost in all of the discussions by western media is the fact that no-one has ever attempted to structure a comprehensive and enforceable trade agreement with China before. What the U.S. team is attempting will be the road-map for all other nations who will likely write similar agreements of their own.
Writing a trade agreement between a free-market (USA) and a controlled-market (China) is where the challenge lies. One of the inherent issues will always be how the free-market system can hold the controlled-market system accountable if they cheat.
Given the controlled-market’s governmental support for the cheaters, the accountability will naturally have to come from outside the system. It remains to be seen if it can be done.
Arguably President Trump has a disposition that he doesn’t see how a deal is possible. However, Trump is willing to allow Lighthizer, who really is brilliant (along with Secretary Mnuchin and Secretary Ross), plenty of space to approach this problem with unique solutions.
As President Trump just said: “The quality of the transaction is far more important to me than speed. I am in no hurry.”
The tariffs will continue until behavior improves.