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Tough stance on China not paying off: US trade experts

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The Trump administration's hard-line approach to its ongoing trade spat with China has not paid significant dividends to this point, according to experts, and the strategy could even continue to slow progress toward a reduced trade deficit as the countries intensify negotiations on a trade deal over the coming weeks.

Negotiators from China and the U.S. wrapped up their third day of ministerial talks on Jan. 9 in Beijing without a permanent deal on tit-for-tat tariffs that have led the two countries to an all-out trade war.

The U.S. Trade Representative's office said in a Jan. 9 statement that the talks focused on China's commitment to purchase a "substantial amount" of American agricultural, energy, manufactured goods, and other products as well as a reduction in the current trade deficit between the two countries. The agency did not specify when the next meetings will take place.

While China appears to be taking a 90-day detente on tariffs reached on Dec. 1 seriously — with concessions on tariffs on U.S. auto and soybean exports out of the gate — experts said they have not seen the kind of concrete results needed to fundamentally change the trade relationship and hand Trump a political victory.

The Trump administration has stated that its objectives with China include: reducing the trade deficit by reducing Chinese imports, reducing forced technology transfer of American companies doing business in the Asian nation, pressuring China to open its market to more U.S. exports and lowering tariffs on U.S. exports.

The administration has often held up the Made in China 2025 plan, which seeks to support Chinese manufacturers through state support and intervention, as a key factor that disadvantages U.S. industries because of unfair subsidies. U.S. Commerce Secretary Wilbur Ross has said that China's commitment to step back on that plan would help curb intellectual property theft, but only if it is enforceable in any such deal.

Against those stated objectives, some experts said the administration has fallen short thus far, while others say it is on track to partially meeting them.

Gary Hufbauer, nonresident senior fellow at the Peterson Institute for International Economics, sees the Trump administration's negotiation process as a "roller-coaster approach," one marked by ups and downs, or "good and bad vibes."

The Trump administration has imposed three batches of tariffs on a total $250 billion of Chinese imports, the latest being a 10% tariff on $200 billion of goods that went into effect in September 2018. China has retaliated with tariffs on $110 billion of U.S. exports.

Negotiators are now trying to hammer out a permanent solution to prevent a threatened U.S. rise in tariffs to 25% and soften Chinese tariffs on U.S. exports.

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Hufbauer said prior iterations of 25% or 10% tariffs on Chinese goods may be reduced, but he does not believe they will be completely removed.

"However, the Chinese retaliatory tariffs could be completely removed," Hufbauer said. "If it's asymmetrical, Trump can claim a victory."

Still, this "victory" could be seen as little more than political symbolism, Hufbauer added.

A permanent deal is unlikely by March or in the near future, said William Reinsch, senior adviser and Scholl Chair in International Business at the Center for Strategic & International Studies in Washington.

"We are asking them to do things they are unable to do," Reinsch said of China. "We want them to fundamentally alter the way their economy works in a way that will reduce the party's control. That doesn't mean there won't be a deal, but there won't be one that addresses all of our problems."

The basis for much of the harsh trade actions by the U.S. is centered around punishment for China's forced intellectual property transfer practices uncovered by a Section 301 investigation in 2017 and 2018.

The administration has taken particular issue with Made in China 2025, the Chinese policy and industrial strategy aimed at boosting domestic production, especially within the high-tech sector.

Reinsch said he does not believe that China will abandon the policy, though he believes it may be rebranded to make it look like it has gone away.

"Giving it up would mean fundamental change they're not willing to make," Reinsch said. "They will probably agree to a big market access package, but whether it will materially affect the trade deficit is uncertain."

Recent Concessions by China

Beijing, meanwhile, has shown some move toward good faith bargaining in recent weeks, agreeing to purchase more American soybeans and other agricultural products as well as liquefied natural gas and other energy products.

China's customs authority also said Dec. 27 that it would begin to buy U.S. rice for the first time, an announcement that came about two weeks after Beijing said it would suspend tariffs that it imposed on American automobile exports several months earlier, though several experts said that the low demand for American cars in Beijing makes that tariff reduction easy to absorb.

Peter Allgeier, president of international trade at consulting firm Nauset Global LLC and former U.S. Ambassador to the World Trade Organization and deputy U.S. Trade Representative under the Bush and Obama administrations, said the recent concessions by China do not solve the underlying problems.

"You can agree to buy X amount of soybeans or automobiles, but that's not really a legitimate objective," Allgeier said. "It's not changing the system."

Any notion of a "truce" is overblown, Allgeier added.

"I don't think that's the proper military term," Allgeier said, adding that the most that could come out of a 90-day negotiating period is a framework of what the basic issues are. "It's a bombing pause. Basically, Trump has said, I won't continue the bombing for 90 days, but you need to basically concede by then. I don't think there's much of an agreement there."

The 90-day detente, agreed to on the sidelines of the G-20 Summit in Buenos Aires, Argentina, stipulates that no further tariffs or tariff rate hikes will be imposed as the two countries work to quell the fiery rhetoric that dominated much of their economic relationship in 2018.

However, should a deal, or perhaps an extension, not be reached by March 2, Trump has pledged to forge ahead with a scheduled tariff rate hike, and possibly explore further tariffs on an additional $267 billion of Chinese goods.

Ross, meanwhile, said in an interview with CNBC on Jan. 7 that there is a "very good chance that we'll get a reasonable settlement that China can live with, that we can live with and that addresses all the key issues."

"It makes sense to engage China now, because we have their attention," Claire Reade, senior counsel at Arnold & Porter in Washington and former Assistant U.S. Trade Representative for China Affairs under the Obama administration, said in an interview. "It will take time to understand what is really on the table for a deal and it will take time to negotiate any positive outcomes if they are possible. If no good deal is possible, the U.S. has not lost leverage by trying now."

Reade, who also served as chief counsel for China Trade Enforcement in the USTR office under the Bush administration, said she does not see Beijing changing its fundamental system in response to U.S. pressure, but left open the possibility that it could remove significant market distortions and curb unfair practices. This is dependent on whether a deal includes what she called "guardrails" ensuring that changes are real and permanent.

But at least one expert believes that China, with its capacity to survive domestically off its own goods, has the upper hand and can outlast Washington's tariff-heavy approach.

"I think we should let China know we're serious about finding real solutions in those areas, but shooting ourselves in the foot through tariffs is something that the Chinese must be able to wait out, and it won't be good for us," said Dan Ikenson, director of the Cato Institute's Stiefel Center for Trade Policy Studies.

Trade Deficit

Trump has repeatedly railed against the United States' ballooning goods deficit with China, but data shows that the deficit has actually grown under his tenure in the Oval Office, especially in the waning months of 2018 as steeper tariff measures were implemented.

The U.S. ran a $375.6 billion goods deficit with China in 2017, according to the U.S. Census Bureau. In 2018, the deficit widened each month between March and October.

U.S. exports to China fell 29.6% year over year in October 2018, including near-zero shipments of soybeans, energy and cars, some of the most valuable products targeted by Chinese retaliatory measures.

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According to Panjiva Inc., a division of S&P Global Inc., American companies sourcing Chinese products included in the $200 billion batch of tariffs are actually bringing goods in at a faster rate, stifling any attempts at reducing the deficit.

Chris Rogers, research director for Panjiva, said in an interview that imports of industrial components will likely rise due to their longer shelf life, though consumer products, especially where those inventories are already full, likely will not.

According to Panjiva, U.S. imports of chemicals and electrical equipment rose by 34.1% and 15.9%, respectively, in the three months ended Oct. 31, 2018.

Hufbauer of the Peterson Institute does not see reducing tariffs brought about by the U.S. doing much to reduce this ever-increasing deficit.

"For the trade deficit, this will do very little," Hufbauer said. "The macroeconomics is what is driving the deficit."