LDN - Business

Thirty years on, U.S.-China politics and tech collide

[February 25, 2019] By Andy Bruce

LONDON (Reuters) - "U.S. EASES CURBS ON EXPORTS TO CHINA" read a Reuters headline on March 1, 1989, when Washington lifted long-standing restrictions on technology shipments to China.

On that day 30 years ago, U.S. commerce officials talked warmly of improving ties with China and of the need to help its economy -- then about half the size of Italy's -- to grow, despite the objections of military strategists at the Pentagon.

Next Friday not only marks the 30th anniversary of the decision, but it is also the deadline set by President Donald Trump for a deal to end the seven-month trade war between the United States and China, now its biggest economic rival.

A different kind of technology transfer is at the center of the trade tussle that is likely to play a big part in defining the path of the world economy in years to come.

The United States has accused Beijing of forcing U.S. companies doing business in China to share their technology with local partners and hand over intellectual property secrets, charges that China denies.

More broadly, the row over trade has produced tit-for-tat tariffs on hundreds of billions of dollars of goods, disrupting manufacturing supply chains and weighing on the global economy.

Without a deal on March 1, U.S. tariffs on $200 billion of Chinese goods are scheduled to rise to 25 percent from 10 percent, although Trump has said he may be flexible on the deadline if he sees progress being made.

But the current stand-off is widely seen as just part of a broader struggle for hegemony between the world's two biggest economic powers.

"The tensions between the United States and China are obviously not just about trade," said Paul Gruenwald, global chief economist at ratings agency Standard & Poor's.

He said China had offered to buy more U.S. soybeans, liquid natural gas and airplanes, but the bigger issues are about intellectual and technology transfers as well as state subsidies.

"I suspect the negotiations are going to be tricky. I can't see big changes by China," Gruenwald said.

TECH-TAC-TOE

Negotiators are drawing up six memorandums of understanding on structural issues: forced technology transfer and cyber theft, intellectual property rights, services, currency, agriculture and non-tariff barriers to trade, two sources familiar with the progress of the talks told Reuters in Washington.

Failure to reach a deal would have big consequences, and not only for the world's top two economies.

In a full-blown trade war with 25 percent tariffs on all goods flowing in both directions, China could lose up to 171 billion euros ($194 billion) in exports to the United States -- around a fifth of the current annual total -- according to a new report from EconPol Europe, a research network founded by Germany's Ifo Institute.

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U.S. Trade Representative Robert Lighthizer, left, listens as Chinese Vice Premier Liu He talks while they line up for a group photo at the Diaoyutai State Guesthouse in Beijing, China February 15, 2019. Mark Schiefelbein/Pool via REUTERS

The United States, meanwhile, would lose around 51 billion euros of exports going to China.

The winner -- at least in the terms of crude mercantilism favored by some -- could be Europe.

"Trump may claim victory as the U.S. manufacturing sector grows while the Chinese one shrinks, and the bilateral trade balance of the U.S. with China improves," EconPol Europe researchers Gabriel Felbermayr and Marina Steininger said.

"However, with the EU it deteriorates and Europe's trade (surplus) with the U.S. becomes even larger," they added, since the United States would turn to Europe to substitute at least some of its Chinese imports.

And that could stoke further antagonism from the United States directed at the European Union, Felbermayr and Steininger said.

Trump on Wednesday said the United States would impose tariffs on European car imports if it cannot reach a trade deal with the EU.

THE BIG TRADE IS TRADE

While Trump is also due to travel to Vietnam for talks with North Korean leader Kim Jong-un on Wednesday and Thursday, the U.S./China trade talks are more likely to be the key driver for markets, Investec economist Philip Shaw said.

"Thus far the direction of travel appears to be positive. But offsetting some of the positive tone are concerns that the U.S. administration may launch a car-based trade war with the EU," Shaw said.

For the shorter-term prospects of the global economy, investors are waiting to hear U.S. Federal Reserve Chairman Jay Powell answer questions from lawmakers on Tuesday and Wednesday.

Powell and his fellow Fed rate-setters have adopted a new "patient" approach to further interest rate hikes, putting their three-year-old policy tightening on hold.

In Britain, the Brexit process faces a potentially important moment with another vote expected on Wednesday in parliament about Prime Minister Theresa May's strategy, after she lost the last one by a big margin.

With little more than a month to go until Britain is due to leave the EU on March 29, signs of a major breakthrough in talks between Brussels and London remain elusive.

"We think there is a fairly high chance now that the Brexit deadline will be pushed back," wrote economists at ING.

"The question nobody really has the answer to is how long might an extension last?"

(Reporting by Andy Bruce; Additional reporting by William Schomberg; Editing by Hugh Lawson)

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