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Economy

Shanghai Offers a New Stage for China-US Trade Talks

Jul 29 , 2019

Chinese and U.S. negotiating teams will begin their 12th round of talks in Shanghai next week in order to implement the agreement reached between Chinese and U.S. leaders during their June Osaka meeting. This will be the first time such negotiations will be held outside of national capitals — a significant shift. Shanghai is not only China’s economic and financial center, but it also holds a special position in the development of China-U.S. relations. As U.S. Treasury Secretary Steven Mnuchin reminded, Shanghai was the site where the two countries signed the China-U.S. Joint Communique (also called Shanghai Communique) during the Nixon presidency and started the historical process of normalizing bilateral relations. Choosing it for the pre-sent negotiations is an auspicious omen.

The two negotiating teams, which have been under high pressure, would be wise to spare some time to reflect on the difficult negotiations that preceded the Shanghai Communique. Henry Kissinger began discussions with Zhou Enlai about the contents and wording of the Shanghai Communique in October 1971, during his second visit to China. The thorniest part of the talks turned out to be dealing with the Taiwan issue. The two parties’ disputes lasted until February 1972, when Nixon visited China. Finally both sides made necessary compromises. A New York Times editorial said the significance of the communique lies in the fact that diplomacy took the place of military force and paved the way for China-U.S. negotiations that followed.

Indeed, negotiations are always a process of mutual compromise, otherwise the agreement becomes a “letter of surrender.” Both President Trump and his economic advisor, Larry Kudlow, had claimed it would be easy for the U.S. to win a trade war with China; what Washington wants is not a “50-50 agreement.” The Trump administration seems to have underestimated resilience of the Chinese economy and the Chinese leadership’s will to counter unreasonable requests.

More importantly, market and business laws themselves are now demonstrating their impacts. The trade war’s comprehensive influences on the U.S. economy are undeniable: the U.S. stock market has consistently fluctuated in step with bilateral negotiations. Customs statistics show further expansion of the U.S. trade deficit with China in the first half of 2019, proving Trump’s tariffs have failed to effectively reduce deficits. In order to cope with risks brought by the China-U.S. trade war, the Federal Reserve will choose to cut interest rates in July and later this year. The recent issue of the World Economic Outlook from the IMF indicates that the trade war has resulted in U.S. domestic demands failing expectations and imports weakening, and predicts that U.S. economic growth will drop to 1.9 percent in 2020.

Trump has recently consulted many advisors, both in and outside of the White House, who believe easing the trade war is one of the best ways to postpone an economic slowdown, and that the U.S. would be wise to prevent trade issues from becoming its “prosperity killer” or Trump will pay a heavy price in the 2020 elections.

We should not expect the Chinese and U.S. negotiating teams to make many breakthroughs in their Shanghai talks, but the upcoming round of negotiations will still be of critical significance.

First, they are conducive to preserving the positive momentum of both parties’ recent endeavors for easing the “trade war.” After the leaders’ Osaka meeting, Chinese firms have begun to purchase U.S. farm produces in large quantities. Such companies as Zhonghai Cereals and Oils Industry Co., Ltd. will import more than 3 million tonnes of tariff-free American soybeans. This is better than the alternative, the U.S. Department of Agriculture issuing dozens of billions of U.S. dollars of subsidizes to American farmers.

There are other signs of positive momentum: the U.S. claims it will abolish punitive tariffs on 110 Chinese goods. The White House appears to be softening its stance on Huawei — both Kudlow and Mnuchin believe it is unnecessary to play the “security card” against all of Huawei’s businesses. And on July 22, CEOs of such firms as Google, Qualcomm, and Sysco had a meeting with Trump at the White House, expressing the hope that the U.S. Department of Commerce would issue permits for them to sell to Huawei.

Second, by holding the talks in Shanghai, the U.S. team can better understand China’s progress in deepening reform and opening up, as well as the complicated challenges the country faces. In the past five years, a series of reforms and innovations have been implemented in Shanghai’s pilot free-trade zone, aiming at realizing freer flow of capital, goods, and personnel. Since the 2018 Negative List was issued, the Shanghai free trade area has set up 601 foreign-funded projects, attracting $4.23 billion of contracted foreign investments. The arrival of such foreign projects as Tesla and Moo-dy’s (China) are indicators of the increasing openness of several business sectors in-cluding new-energy vehicles and credit ratings.

Since September 2013, 12 pilot free-trade areas have been established across China, garnering more than 200 achievements in systemic innovation. Six more pilot areas will be set up, including an extension of the current FTA in Shanghai. Through such experiments, China is striving to avoid mistakes in implementing reform and opening up, and at the same time is responding to the development needs of different regions. The Trump administration seems to still believe China can satisfy U.S. demands by mandatorily revising some laws, which is unrealistic.

Third, Chinese and U.S. negotiating teams need to handle bilateral trade disputes, as well as those related disputes in technology and regulation, with more market- and business-friendly approaches. President Trump has stated he is not in favor of “decoupling,” yet many of the U.S. government’s recent moves have invited opposition from Chinese and American companies, especially those from the technological sectors. For instance, many American firms worry excessively strict technology export control may backfire and damage the U.S.’s own ecosystem for innovation and competitive-ness.

The negotiating teams may consider holding joint hearings so as to better understand the needs of Chinese and American businesses, and come up with more effective and sustainable solutions to such problems as how to regulate technological competition. The U.S. team should maintain due respect for China and Chinese firms, and refrain from applying such labels as “IPR thieves,” which turn negotiations into a trial of the Chinese side. On July 18, during a hearing about IPR protection, Doug Collins, vice chairman of the U.S. House of Representatives Judiciary, praised Alibaba for employing high-tech means to fight counterfeits and protect consumers, even suggesting that the latter’s anti-counterfeits policies and projects are much better than its American counterparts’.

To sum up, the upcoming “Shanghai process” of China-U.S. trade negotiations may be a sign that the two parties will pay more attention to market and commercial factors, rather than letting political factors and national security issues continue to disrupt negotiations. Trump’s advisors believe he can turn the China issues into an advantage in the 2020 elections, but that will entail greater sincerity and mutual compromise to effectively resolve bilateral economic and trade spats.

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