China trade steps seen as good start but leave core U.S. demands untouched

[December 17, 2018]  By David Lawder

WASHINGTON (Reuters) - The United States has welcomed Chinese concessions since the two declared a trade war truce in early December, but trade experts and people familiar with negotiations say Beijing needs to do far more to meet U.S. demands for long-term change in how China does business.

U.S. President Donald Trump and his Chinese counterpart, Xi Jinping, agreed on Dec. 1 in Buenos Aires to stop escalating tit-for-tat tariffs that have disrupted the flow of hundreds of billions of dollars of goods between the world's two biggest economies.

Since then, Beijing has resumed buying U.S. soybeans, the single largest agricultural export between the two countries. China has also cut tariffs on imports of cars from the United States, dialed back on an industrial development plan known as "Made in China 2025," and told its state refiners to buy more U.S. oil.

Trump took those as signs that "China wants to make a big and very comprehensive deal."

But they only start to bring Beijing and Washington back to their pre-trade-war status quo, experts said, and do little to resolve core U.S. demands for structural changes in China to end policies that subsidize large state-owned enterprises and effectively force the transfer of American technology to Chinese firms.

"I think these are goodwill gestures, but they don't go beyond offers that were on the table before Trump launched his trade war," said Gary Hufbauer, a senior fellow and trade expert at the Peterson Institute for International Economics.

"Much more will have to be offered by China to reach an interim agreement in March 2019," Hufbauer said, adding that structural changes would be far harder to agree on, much less achieve, by then.

Trump and Xi agreed on Dec. 1 to launch new talks while the United States delayed a planned Jan. 1 tariff increase until March 2.

A spokeswoman for U.S. Trade Representative Robert Lighthizer, who is leading talks from the American side, did not respond to queries about the significance of China's trade steps.

No schedule for face-to-face talks between U.S. and Chinese officials has been announced since Trump and Xi met, but a person familiar with the discussions said meetings would likely take place in early January and that the two sides were in frequent contact.

NO 'TREMENDOUS' PURCHASES YET

The first signal that China had resumed purchases of U.S. soybeans came in a Reuters interview last week with Trump, who said Beijing was buying "tremendous" amounts of soybeans.. China had stopped importing the oilseed from the United States in July, when the two countries unleashed new tariffs on each other's goods.

But the initial purchases of 1.5 million tonnes disappointed traders and were only a fraction of the 30 million to 35 million tonnes China buys from U.S. farmers in a typical year, with 2017 purchases of $12 billion.

"We're glad to have it, and we hope there is more," a person familiar with the U.S. negotiating strategy said of China's initial soybean purchases.

"Remember, even with the tariffs, the expectations were still for $7 billion worth of soybeans going to China. And we haven't seen that."

The concession that most captivated Trump was China's suspension of a punitive 25 percent tariff on U.S.-built vehicles, cutting its tariff rate back to the 15 percent global rate it put in place in May..

President Donald Trump, U.S. Secretary of State Mike Pompeo, U.S. President Donald Trump's national security adviser John Bolton and Chinese President Xi Jinping attend a working dinner after the G20 leaders summit in Buenos Aires, Argentina December 1, 2018. REUTERS/Kevin Lamarque/File Photo

Derek Scissors, a China scholar at the American Enterprise Institute, a business-oriented think tank in Washington, said the move was a "reasonable trade step," but taken years too late. He added China would not likely increase imports from the United States because of a slowing market and excess domestic production capacity.

"Trump is right to say it's a positive move, but in a year he's going to be angry because auto exports to China aren't going to have budged," Scissors added.

China also issued guidance to local governments dropping references to its "Made in China 2025" high-tech industrial development goals amid reports it was looking to replace the program aimed at rivaling U.S. dominance in industries such as aerospace, robotics, semiconductors, new energy vehicles and artificial intelligence.

U.S.-China trade watchers expressed the most skepticism about that move, because state control of China's economy has increased under Xi and few see China agreeing to abandon its industrial policy goals of developing national champions in future industries.

SIGNALS FROM XI

Signals of further concrete steps could come from Xi on Tuesday in a speech marking the 40th anniversary of China's 1978 economic opening under late leader Deng Xiaoping and a major Communist Party conclave on economic policy. Some Chinese government advisers have called for accelerated reforms on the anniversary.

Scott Kennedy, director of China studies at the Center for Strategic and Economic studies in Washington, said it was essential that Xi send "unequivocal signals about the broad direction of greater liberalization."

"The next step would be to see a series of substantial reforms taken on their own, and all of that would lay the groundwork for renewed U.S.-China negotiations early in the new year," Kennedy added.

One of the people familiar with the talks said Lighthizer would insist on commitments and evidence that China is changing laws on competition policy, joint ventures, intellectual property rights and market access and enforcing the changes.

"It would be great if Xi Jinping, in the name of achieving competitive neutrality, pledges to take very concrete steps that would strip immunity and special treatment from state-owned enterprises in Chinese law," the person said.

"They've got to go considerably past the old status quo on a lot of difficult issues to be able to claim that they've done something really significant."

(Reporting by David Lawder; Additional reporting by Chris Prentice in Washington; Editing by Simon Webb and and Peter Cooney)

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