Critical China trade talks open amid tough U..S action against Huawei

BEIJING – When Chinese Vice Premier Liu He, the head of the team handling trade negotiations with the United States, landed in Washington on Monday for a critical round of talks this week, what greeted him wasn’t so much a welcome as a broadside.

As his delegation touched down, the Justice Department unveiled allegations that Chinese telecom giant Huawei Technologies had stolen intellectual property from the United States – one of the main, long-standing U.S. grievances about China’s trade and industrial practices.

Whether the timing was intended or not, two sweeping new U.S. indictments against a globe-spanning Chinese conglomerate are casting a long shadow over a critical round of talks this week between the negotiating teams led by Liu and U.S. Trade Representative Robert Lighthizer.

The indictments also added to a sense in both capitals that the U.S.-China rivalry is in full swing, and that a far-reaching deal that would satisfy Presidents Donald Trump and Xi Jinping may not materialize this week even if the two sides agree to a temporary truce.

Negotiators this week are hoping to reach an accord that could at least avert a new 25 percent levy on $200 billion worth of Chinese goods – tariffs that Trump has ordered to begin March 2, absent a deal.

“I’m not saying that there will be an ugly showdown between two the countries at the end of the talks, but it could be a dormant volcano that becomes active every few months and adds uncertainty to the global trade and economy,” Zhang Yansheng, secretary general of the academic committee at the National Development and Reform Commission, China’s powerful economic planning body, told reporters Tuesday.

Although China has offered significant purchases of U.S. exports to close the trade deficit and promised to crack down on intellectual property theft – issues underscored by the American indictment against Huawei – it has not yet offered an acceptable mechanism that would let the United States hold it accountable for those promises, according to scholars and trade group representatives who have spoken to U.S. negotiators.

Additionally, the more fundamental U.S. demands for China to open its market and cut government direction and support for state-owned companies – a central tenet of the Communist Party’s tightly managed economic model – remain a nonstarter for Beijing.

“There’s still a pretty significant gap on structural and tech transfer issues,” said one American trade association representative who met recently with Lighthizer and spoke on the condition of anonymity to discuss a private conversation. “It doesn’t appear that the wide gap that everyone knows exists has been narrowed in any way.”

This week’s talks will be led by Lighthizer, a trade hard-liner who is deeply skeptical of China’s willingness to change its trade practices and has been privately dismissive of progress made to date.

The talks in the Eisenhower Executive Office Building adjacent to the White House come amid signs that China’s slowing economy is hurting some U.S. companies.

Computer chip maker Nvidia cited “deteriorating macroeconomic conditions, particularly in China” on Monday, as it slashed its fourth-quarter revenue estimate by $500 million.

Likewise, Caterpillar missed its quarterly earnings target by the biggest amount in more than 10 years after construction equipment sales in the Asia-Pacific region fell “due to lower demand in China.”

Even if there is a temporary deal that includes China buying large quantities of U.S. agricultural products, the question of how to enforce issues such as intellectual property protection remains a key concern. Lighthizer has discussed using the threat of renewed tariffs to ensure compliance, an idea the Chinese reject as creating uncertainty over future trade and investment flows, according to people familiar with the negotiations.

Meanwhile in China, analysts and state media outlets have reiterated that Beijing will not budge over the deep changes to its economic model that the United States is seeking.

“There is great uncertainty” about whether a deal can be reached with the United States, said Wang Yong, a professor at Peking University’s school of international studies. “Judging from China’s current domestic politics, it can be said that the space of making a very clear promise to the United States, the possibility of making a concession, is relatively small.”

The United States needs to lower its demands and give China more time, said Wang Yong, a professor at Peking University’s school of international studies. “For China, it has had its development model for so many years,” he said. “Reform or adjustment is not the work of a single day.”

In recent weeks, Xi has sent signals to the Communist Party in study sessions with cadres to firmly uphold China’s existing model and brace for “political risks,” said Scott Kennedy, a China expert at the Center for Strategic and International Studies.

“The Chinese have given no signs that they’re committed to comprehensive market liberalization, and recently the signals have only gotten more intense in the other direction,” Kennedy said. “If they are preparing to make major concessions and engage in thoroughgoing marketization, then they’re keeping it an amazing secret.”

At a time when Chinese leaders are bracing the country for the prospect of a protracted tussle with the United States, the indictments against Huawei, an icon of Chinese technological prowess, have reinforced their rallying cry.

A 13-count indictment filed in New York City against the company, two affiliates and its chief financial officer, Meng Wanzhou, details allegations of bank and wire fraud. A separate 10-count indictment in Washington state also charges the two Huawei affiliates with conspiring to steal trade secrets and obstruction of justice.

Separately on Monday, U.S. officials formally asked Canada to extradite Meng, who is wanted in the United Statesto face charges that she defrauded banks to evade U.S. sanctions against Iran. Beijing has been outraged by the U.S. pursuit of Meng, the daughter of Huawei founder Ren Zhengfei.

“The Chinese have been clearly portraying this through the state media as a political play, and they will try to use it domestically as another example of American political scheming,” said Andrew Collier of Orient Capital Research, a Hong Kong-based financial firm. “But behind the scenes, their negotiators will be pedaling furiously, trying to get the trade spat out of the way.”

Lester Ross, a long-standing member of the American Chamber of Commerce in Beijing and head of law firm Wilmer Hale’s practice in the city, said the Chinese leadership wants to go through with this week’s negotiations and seek a deal at a time when its economic engine is sputtering.

“The Chinese seem determined to carry on with the trade track despite the discomfort of the Huawei case,” Ross said.

Some U.S. officials including Commerce Secretary Wilbur Ross, who has pushed for a deal with China sooner rather than later, have also played down the link between the trade talks and law enforcement actions against Huawei, which have been ongoing for years.

Trump – whose approval ratings sagged during the partial government shutdown – is anxious to hammer out an accord that he can bill as a great achievement, according to several individuals familiar with White House discussions who were not authorized to discuss them publicly.

His administration remains divided between trade hawks such as Lighthizer and White House adviser Peter Navarro, who are intent on forcing China to make fundamental changes in its state-directed economic model, and figures such as Treasury Secretary Steven Mnuchin who want to avoid further disruption to global trade flows and calm roiling financial markets.

At the White House on Monday, Mnuchin said he anticipates “significant progress” this week. The talks will focus on U.S. concerns over intellectual property protections, Chinese regulations governing joint ventures with foreign companies and enforcement measures, he said.

“We expect when we get a deal, that deal will be enforced,” he said. “There’s been an acknowledgment by China that they understand that.”

Still, Lighthizer’s presence at the negotiating table this week could mean that securing a deal will not be easy. The trade representative has been entrusted by Trump to deliver several deals, including pacts with Canada, Mexico and South Korea, while the president rejected earlier efforts by Mnuchin and Ross to compromise with China, said Kennedy of CSIS.

“The Chinese may have the wrong impression that the president will shift among advisers depending on the day of the week, that he himself doesn’t have any bottom line, or that he’s more concerned about the stock market than about fundamental econromic issues,” said Kennedy. “I think that’s a misreading of the landscape in Washington.”