After 100 Days And Much Hype, U.S.-China Talks Fall Flat

7/21/17

By: Jesse Heatley

The first U.S.-China Comprehensive Economic Dialogue (CED) is over -- and there is little to show for it. After months of planning and what Treasury Secretary Steven Mnuchin deemed, “open and frank conversations,” the clock ran down to the 100-day mark, and officials on both sides failed to reach consensus on new trade outcomes.

At the end of the talks, both sides unceremoniously canceled a press conference and abandoned a joint statement. In a late attempt to recast the lackluster results, the U.S. Department of Treasury released a statement Wednesday night noting both sides had a “shared objective to reduce the trade deficit.” The Chinese Embassy eventually held its own press conference and later released a statement affirming the “in-depth exchanges” and recognizing the “candid and friendly spirit” of the dialogue.

Although it allowed for continued exchange, the rebranded bilateral economic talks amounted to a setback given earlier hopes coming out of the Trump-Xi summit at Mar-a-Lago. The CED is one of four major dialogue mechanisms agreed upon in April as replacement for the Obama-era Strategic and Economic Dialogue.

That the U.S. and China failed to achieve meaningful headway now calls into question broader U.S.-China policy and economic cooperation in the near term -- particularly as both countries' leaders face domestic pressures.

What a difference a hundred days make

Despite repeatedly railing against China and its trade imbalance with the U.S., President Donald Trump heralded the Mar-a-Lago summit as a breakthrough for U.S-China relations.

By May, the U.S. and China announced “initial commitments,” under the 100-day action plan framework, covering ten broad areas, including agricultural trade, financial services, investment, and energy. These “early harvest” outcomes represented a clear path forward -- even with some relatively unimpressive or previously-won deliverables.

Yet, in the run-up to the CED, senior U.S. officials suggested that Washington would push further for bigger gains with China. The Trump administration clearly felt some pressure. Disappointment over China’s lack of progress on North Korea and other economic irritants, no doubt, pushed the U.S. to adopt a more aggressive tone.

Commerce Secretary Wilbur Ross’ opening remarks addressed the trade deficit with China in unusually blunt terms. And the hardnose rhetoric didn’t stop there. Ross and Secretary Mnuchin assailed barriers to China’s markets. Mnuchin urged “the same access for American firms in China as we provide for Chinese firms in the United States.”

The U.S., however, may have ultimately undercut its leverage by threatening to slap tariffs on Chinese steels imports. Several news outlets quoted anonymous sources that said the talks fell apart when U.S. negotiators pushed the Chinese harder on trade commitments than had been expected. The U.S. reportedly pressed China to commit to numerical benchmarks for reducing its trade surplus with the U.S. and to reduce steel overcapacity.

The U.S. also reportedly sought greater access to China’s financial markets, reductions on auto tariffs, and assurances on China’s data localization requirements. Those entreaties fell flat as well.

China holds firm

In the face of hardening U.S. resolve, China held fast. While Beijing publicly suggested a willingness to grant some concessions, it was clear that there were certain unwavering, red lines.

In recent weeks, President Xi Jinping and China’s leaders had opened the door for some negotiations. At a high-level planning session last week, Xi touted the importance of foreign investment in driving China’s growth and said that reducing China’s trade imbalance was a top priority.

But, Chinese officials also set clear limits, consistently warning against any U.S. actions that could spark a trade war. Beijing stressed that a trade war would threaten economic relations and ultimately backfire against the U.S. In pointed criticism, Chinese officials and media warned that such actions would endanger growing Chinese investments in the U.S. that stand to help U.S. businesses.

In addressing the trade deficit, Beijing also took aim at specific U.S. barriers to Chinese trade that contributed to the imbalance. In his remarks at a business luncheon before the CED, Vice Premier Wang Yang, who chaired the talks on the Chinese side, took umbrage with “outdated U.S. regulations on export controls.” Wang insisted that these rules added to the trade deficit by undercutting U.S. exports of “advanced technologies, key equipment and critical parts to China."

Wang warned not to push China too hard and declared that “confrontation with the U.S. will not resolve differences.”

What’s next for U.S.-China trade relations?

With the CED over, the U.S. and China will now focus on planning for President Trump’s state visit to China in the fall. Both sides will be searching for deliverables on economic issues. While the Chinese side has proposed a “One-Year Plan” on trade, the Trump administration will likely press for more concrete commitments on steel and the trade imbalance.

But reaching consensus will be even more challenging in the coming months. President Xi is increasingly preoccupied with domestic politics surrounding the upcoming 19th Party Congress, which will bring substantial changes to China’s top leadership. At the same time, the Trump administration is now nearing a decision to impose tariffs or other restrictions on steel imports from China and other countries.

Since President Xi cannot appear weak in the lead-up to China’s leadership transition, unilateral protectionist actions by the U.S. will almost certainly bring Chinese retaliation against U.S. commercial interests.