US-China trade talks begin

U.S. and Chinese negotiators held their first face-to-face talks since the world’s two largest economies agreed to a truce aimed at resolving their trade dispute.

China’s most senior economic official made an unexpected appearance at talks with the US signalling Beijing’s eagerness to end a bruising economic battle between the two countries.

Background

The United States and China are two of the largest economies in the world. Both countries consider the other as a partner in trade and an adversary in geopolitics. Diplomatic relations between the US and China was first established in 1844 with the Treaty of Wanghia. This agreement allowed the US to trade in Chinese ports. After the Qing Dynasty was overthrown, in 1911, the US recognized the legitimacy of the Republic of China (ROC) government.

The U.S.–China Strategic and Economic Dialogue were created in 2009. Every year, high-level representatives from both nations open up dialogue to improve economic partnership. In 2017, the meetings that occurred were reported as being “tense”. Upon conclusion, the two countries cancelled a joint press conference and did not release a statement. They also did not release a plan of action.

US President Donald Trump has previously been a critic of China. He blamed the country for loss of jobs within the US and has often criticized the US trade deficit with China. China's trade surplus with the United States widened in 2017 while total foreign trade volume maintained rapid growth. However, there has been a mutual de-escalation of the ongoing trade war. Both the US and China had agreed to suspend imposing new tariffs until January 2019 when Ministry-level trade talks are expected.

Analysis

The appearance of one of China’s most senior officials at the talks surprised analysts because the negotiations are supposed to be between mid-tier bureaucrats. Beijing’s show of support for the negotiations comes as both sides face the prospect of an economic slowdown, which is driving volatility in financial markets. The S&P 500 has fallen 13 per cent since October while Chinese stocks were the worst performing in the world last year.

The visiting delegation, led by Deputy U.S. Trade Representative Jeffrey Gerrish, left its hotel in Beijing without speaking to reporters for the first day of talks. President Donald Trump raised hopes last week that an agreement could be found to end the months-long dispute, during which the world’s top two economies have imposed import duties on more than $300 billion of each other’s goods. “I think we will make a deal with China,” Trump said on Friday.

“We have a massive trade negotiation going on with China. President Xi (Jinping) is very much involved, so am I. We’re dealing at the highest levels and we’re doing very well.” Trump headed to the U.S. presidential retreat at Camp David, Maryland, where he said he would discuss a trade deal with China with senior aides, among other issues. The American delegation in Beijing includes officials from the Treasury, Commerce, Agriculture and Energy departments.

The talks come a month after Trump and Xi agreed to suspend a planned tariff hike for three months to give negotiators space to reach an agreement and end a dispute that has roiled world markets. Some expect that Mr. Gerrish’s immediate boss, US trade representative Robert Lighthizer, would be unwilling to resolve the issue too quickly so as not to lose leverage in his broader effort to decouple American manufacturing from China and bring it back onshore.

The ratcheting dispute has pummeled confidence in China, sending the stock markets tumbling while the yuan has fallen against the dollar. Chinese stocks closed higher as the trade talks got underway and the central banks in both Beijing and Washington signalled looser monetary policy.

China is grappling with a slowing domestic economy, with growth easing to 6.5 per cent in the third quarter, as a battle against debt has ramped up. The government has set a growth target of around 6.5 per cent for 2018, down from 6.9 per cent in 2017. Since the truce announced last month, China has taken initial measures to support the negotiations.

Beijing suspended extra tariffs on U.S.-made cars and auto parts for three months, while a major state grain stock-piler made purchases of American soybeans.

Assessment

Our assessment is that Trump’s steadfast negotiation tactics have allowed the US to secure some commitment from the Chinese. There is now a move away from confrontationist posture to one of engagement. We feel that the US will gradually work on security concerns like China’s attempt to expand in the South China Sea and China’s cyber-enabled theft of US intellectual property. We believe that it is equally important to ensure the Chinese ‘do not lose face’ in the current trade war.

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