Momentum builds for US and China to strike trade deal

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US Treasury Secretary Steven Mnuchin (L), who is seen as a moderate in his approach to China trade discussions, is reportedly gaining influence with the president.

Two weeks ago, when the Trump administration sent a delegation to Beijing in an effort to move the ball forward on trade negotiations, there was little reason for optimism. The trip itself was seen as a glimmer of hope that the world’s two largest economies would avoid a tariff battle that could derail the global economic recovery.

But the addition of hardliners Commerce Secretary Wilbur Ross and White House trade advisor Peter Navarro to the negotiations, originally spearheaded by Treasury Secretary Steven Mnuchin, dampened enthusiasm.

Fast forward to the second round of the last-ditch bilateral effort to avoid a tariff war, currently under way in Washington, and a series of developments suggest that the White House may be itching for a deal.

The first sign that US President Donald Trump was prepared to back off his characteristically unrealistic starting negotiating position – that China abandon the core of their economic policy and erase the trade deficit or face tariffs on US$150 billion of goods – came on Sunday with a tweet.

Trump said he was working with Chinese President Xi Jinping to give Chinese telecom giant ZTE “a way to get back into business.” The comment was in reference to a ban on US sales of components to ZTE, a move that analysts saw as a virtual death sentence for the firm.

Then on Monday it was reported that Ross, who heads the agency that slapped the ban on ZTE – the harshest possible penalty for the company’s violations – has lost influence with the president.

Citing current and former administration officials, Politico reported that Ross has been marginalized and “Mnuchin’s influence with the president is on the rise.”

On Wednesday, another scoop reported that Ross’ hawkish ally in the trade battle with China, Navarro, has also been sidelined. The White House later pushed back on an article from Bloomberg, saying that contrary to the reporting Navarro would indeed take part in the talks.

But another report from Axios on Wednesday revealed that Navarro felt sidelined by Mnuchin even several weeks ago during their trip to China. Navarro “cursed at Mnuchin and fumed about being shut out of the talks,” sources “familiar with their encounters” told the news outlet.

Meanwhile, Trump has yet to push back on economic advisor Larry Kudlow’s remarks in an interview on Tuesday that the president doesn’t want a trade war with China and is a free trader.

“There’s a little bit of a bromance [between Trump and Chinese President Xi Jinping],” Kudlow said in the interview with Axios. “Bromances are always good.”

The day after Kudlow made similar remarks in April, playing down the chances that tariffs would even go into effect, Trump doubled down on his threat, directing trade officials to identify additional tariffs on US$100 billion in Chinese imports.

ZTE is key
Trump’s tweet on ZTE, which he has yet to materially walk back despite a harsh backlash from allies in the media, may be the most telling. On Wednesday morning he clarified that no final decision has been made on the issue “except as it pertains to the larger trade deal.”

In a television interview with Bloomberg on Tuesday, Ian Bremmer, president of political risk consulting firm Eurasia Group said in regards to the tweet that “It’s very clear that Trump wanted to find a deal with China on trade.”

Backing off the harsh penalties slapped on ZTE was reportedly a requirement stipulated by China for the talks this week to even move forward. Some say there is no realistic way to envision Beijing coming to the table without that precondition.

“I think it has to be [part of a deal],” said Jesse Heatley, Director at the China practice of Washington DC-based consulting firm Albright Stonebridge Group. “If ZTE were to fall from its top role [in establishing 5G standards], China would be ceding a great deal.”

Heatley, who advises US technology firms on Chinese policy, added that the ban on sales to ZTE could potentially represent a significant setback to China’s plans to be leader in high-tech industries.

“5G is going to matter tremendously as China looks to develop smart cities, the Internet of Things, broadband connectivity, and autonomous vehicles,” he said, referencing priorities outlined in Made in China 2025.

Midterms loom large
Trump will get hit from both sides of the political aisle in the US if he goes easy on ZTE, including from his base of supporters who broadly support a hard line with China on trade.

But the president’s focus has been shifting in recent weeks to the political prospects of his party in midterm elections.

The Republicans are hoping to defy a pattern that sees a sitting president’s party lose majority in Congress, with the Democrats’ advantage in polling evaporating. The apparent reason is voters’ support of the Republican Party’s handling of the economy.

A tariff war, economists warn – beginning as soon as this summer ahead of the November elections – would have an immediate negative impact on the economy. Should Democrats win a majority in the House of Representatives, impeachment of the president suddenly becomes a possibility.

With signs the president is ready to make a deal, the question remains: what is China willing to offer? Though details on this front have been scarce, the massive Chinese delegation in Washington this week offers some indication that they are prepared to talk options in a host of areas.

China’s official Xinhua News Agency noted that Liu He, Xi Jinping’s top economic advisor, “leads a delegation whose members come from major economic sectors of the Chinese government.”

As Trump tweeted earlier this week, “stay tuned!”

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