Trade War on Hold – At Least for Now

Economy

Trade War on Hold – At Least for Now

Washington policy analyst Ed Mills discusses the latest trade negotiations between the U.S. and China.

May 21, 2018

In summary: Negotiations between U.S. and Chinese officials in Washington last week wrapped up with a commitment to “substantially reduce” the U.S. trade imbalance with China, specifically by boosting U.S. energy and agricultural exports with a focus on strengthened cooperation on intellectual property protections. The agreement calls for a delay in tariff implementation and could delay the release of the Treasury’s report on restriction on Chinese investments in certain industries and technology. This could be viewed as a double positive in the near term.

Plenty of work remains, and working out specific details will remain a significant challenge. We do continue to believe the final outcome will be a negotiated deal. The turning point to-date in these negotiations appears to have been the Trump administration’s willingness to take actions to block Chinese companies from key U.S. technologies, which could easily be ramped up if trade talks break down.

While this weekend’s headlines were positive, we continue to monitor congressional action on changes to U.S. regulatory approval for foreign investments (generally seen as anti-China), as this could complicate any final deal.

Additional detail provided below.

Agreement in Principle

The joint statement released by the two sides following this week’s negotiations highlights agreement to “substantially reduce” the U.S. trade deficit with China. The administration is targeting a reduction in the annual trade deficit of $200 billion (currently at $335 billion), but the final target has not yet been agreed to by China.

Efforts to boost exports will specifically focus on agricultural and energy resources, with the U.S. possibly moving to secure additional purchases and investment into oil and liquefied natural gas. A commitment from China to boost energy purchases could drive additional energy infrastructure investment, increase China’s longer-term economic dependence on the U.S., and allow the Trump administration to claim a victory in U.S. job creation. Treasury Secretary Steven Mnuchin set an expectation of an increase between 35% and 40% in agricultural exports in 2018 and doubling of energy purchases over the next three to five years.

U.S. officials are expected to travel to Beijing to continue talks and solidify the final details of an agreement.

Intellectual Property

A key focus of the negotiations remains the protection of U.S. intellectual property and the scaling back of forced intellectual property transfers. The official statement moves the two sides closer to agreement on intellectual property protections with China working to modify laws and regulations, although specifics have not yet been put forward.

May 21 marks the deadline for the Treasury’s report on recommendations to limit Chinese investment in critical U.S. technology pursuant to the administration’s Section 301 investigation into China’s harmful intellectual property practices. We are watching to see whether the report is released on condition that the recommendations will not be implemented if a satisfactory deal is reached or if the report is delayed altogether as a goodwill gesture in negotiations.

Congressional Action

Congress is actively working to change the regulatory approval process for foreign investments in U.S. companies, and there has been increased pushback against Trump’s actions related to removing restrictions against Chinese telecommunications company ZTE. Last week, a congressional subcommittee approved an amendment that would prohibit the Commerce Department from removing the restrictions against ZTE. There is almost no chance this provision will become law anytime soon, but we would argue it demonstrates some of the need for both the U.S. and China to conclude these talks sooner rather than later.

The changes being sought to the Committee on Foreign Investments in the United States are clearly targeted at China and are concerned about transfers of critical technology and intellectual property. There have been some tweaks to these efforts lately to placate some business concerns, but Congress is extremely likely to pass this bill by the end of the year. This uncertainty could complicate trade negotiations.



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