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Why US-China trade negotiations may fail

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Why US-China trade negotiations may fail

U.S. Trade Representative Robert Lighthizer said March 12 that trade negotiations with China are entering their final weeks, but a deal still is far from guaranteed. Here are a few of the biggest reasons.

Made in China

A major source of trade tension between the U.S. and China is the Made in China 2025 platform, a sweeping plan for the country to become a world leader in IT and artificial intelligence.

"They're saying, 'We're going to use subsidies and work through [state-owned enterprises] to create these global champions that are going to outcompete and defeat the West,'" said William Reinsch, an undersecretary for export administration in the U.S. Department of Commerce during Bill Clinton's presidency. "Essentially, we're asking them to abandon their fundamental economic goal and do it in a way that will promote more private-sector activity."

The U.S. has maintained that the plan unfairly subsidizes Chinese manufacturers, leaving U.S. industries at a disadvantage. The U.S. could push China to make the platform consistent with World Trade Organization tenets, bringing it more in line with countries such as Germany that push incentives for research and development and intellectual property protection, said David Dollar, an economic and financial emissary to China at the U.S. Department of the Treasury during the Obama administration.

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Adding to the tension is China's need to be perceived as strong against foreign influence, said Simon Lester, associate director of the Herbert A. Stiefel Center for Trade Policy Studies at the Cato Institute, a libertarian think tank. "They don't like signing treaties or negotiating in a way that makes them feel like they're being bullied by outsiders. They're going to be reluctant to sign on to anything that can be perceived as they caved."

Even if the U.S. succeeds in forcing modifications, the core of Made in China 2025 is likely to remain intact.

"What [Chinese President Xi Jinping] has offered on China 2025 is to make it less in your face, to rebrand it and to make it more hidden," said Brad Setser, a former U.S. Treasury economist. "He doesn't seem to have offered any fundamental shift away on import-substituting policy in key sectors."

Shifting products

The Chinese have put forward offers to purchase billions of dollars worth of additional U.S. agricultural products as the governments seek an end to the trade war, but those are the least valuable concessions for the U.S., said Setser, a senior fellow at the Council on Foreign relations. "Those are areas where one would, even without the trade war, expect U.S. exports to grow over time. Soybeans and oil and [liquefied natural gas], China was going to buy no matter what, and if China wasn't going to buy the oil or LNG, someone else would."

China had stopped buying U.S. soybeans in retaliation for U.S. tariff actions. This increased U.S. soybean exports to the EU, with Brazilian soybeans filling the void for China. Lester, a former legal affairs officer at the appellate body secretariat of the WTO, said the U.S. faces production limits on soybeans and LNG, and it is difficult to respond quickly to that kind of production demand.

"We were just moving things all around," Lester said when discussing the shift from Chinese to EU soybean sales. "Unless the overall level of demand goes up, there's just not really a way that we can get a whole lot more sales out of this."

'A rock and a hard place'

President Donald Trump's stated goal of reducing the trade deficit with China — or any other country — will be hard to bring about under current economic conditions, Dollar said. "The president's kind of between a rock and a hard place. If [the] U.S. economy keeps performing well, then imports are going to be growing at a rapid rate, and almost certainly our trade deficit's going to be getting bigger with everybody."

A recession, on the other hand, would be expected to lead to a reduction in the U.S. trade deficit with each of the country's trading partners, Dollar added.