Frustration, Miscalculation: Inside the U.S.-China Trade Impasse

The latest breakdown shows the two countries still haven’t found a way to negotiate effectively. ‘Sometimes you need to say “stop screwing me.”’

The U.S. and Chinese governments both sent signals ahead of their trade talks in Washington last week that a pact was so near they would discuss the logistics of a signing ceremony.

In a matter of days, the dynamic shifted so markedly that the Chinese deliberated whether to even show up after President Trump ordered a last-minute increase in tariffs on Chinese imports because the U.S. viewed China as reneging on previous commitments.

Inside the cloistered Zhongnanhai government compound in Beijing, President Xi Jinping and his close advisers discussed how to respond to the tariff increase, given the talks were just days away, according to Chinese officials with knowledge of the decision-making process.

After huddling Tuesday to analyze a press conference given by the U.S.’s two top negotiators, Treasury Secretary Steven Mnuchin and U.S. Trade Representative Robert Lighthizer, Chinese officials concluded that they should travel to at least avoid a rift that could be difficult to repair.

The recommendation went to China’s chief negotiator, Liu He, and ultimately to Mr. Xi. He decided to send the team even though Beijing was fully aware that the trip held little prospect of progress, given how quickly problems had arisen. “The goal was simply to keep the talks going,” said one of the Chinese officials with knowledge of the matter.

By the end of the week, that was as much as both sides could cite for their efforts: the avoidance of a serious rupture that would doom any prospect of a future deal and a commitment to stay near the negotiating table.

So far, the trade talks have provided little evidence that the two nations have found a formula for how to negotiate successfully since Messrs. Trump and Xi met in Buenos Aires Dec. 1, which paved the way to Washington last week.

China didn’t immediately impose new strictures on U.S. businesses, as it has done when things weren’t going well in the past. Mr. Liu is expected to brief Mr. Xi on the discussions he had in Washington before Beijing decides on the next course of action, according to the officials familiar with the process.

.. Bridging the trade rift may ultimately depend on the personal chemistry between President Trump and President Xi and their willingness to push matters forward after months of negotiations that have been full of positive intentions but thwarted by miscalculations, accusations of backtracking and unfulfilled expectations.

.. “They were playing games with us,” said one senior U.S. trade official of the talks in Washington three months ago. Mr. Kudlow told reporters at the time that Mr. Lighthizer “read them the riot act.”

“The more heated moments have been in situations where we thought we had something and suddenly there was some backsliding,” said one person involved in the discussions on the U.S. side.

“We’ve expressed some pretty serious frustration at times,” this person said. “It’s been a necessary ingredient to success. You can be nice to someone, but sometimes you need to say ‘stop screwing me.’ ”

.. “We were in the process of planning for a signing summit with President Trump and President Xi upon the completion of this agreement,” Mr. Mnuchin later told reporters. One of the issues was where to hold the celebratory moment: Washington or Mr. Trump’s golf estates in Mar-a-Lago, in Florida, or Bedminster, N.J., say Trump aides.

 .. Chinese negotiators let their U.S. counterparts know that they had serious reservations with the text. The Chinese were no longer willing to commit to changing laws covering intellectual property, forced technology transfer, subsidies and other issues at the heart of the dispute. They also objected to publication of all the details of the text, preferring a summary.

To the Chinese, this was a matter of honor: The U.S. should trust Beijing to make the changes they said they would make, even if that meant changing regulations rather than laws. Besides, the U.S. was being unfair in refusing, upon the signing of a deal, to remove tariffs that had been assessed in the yearlong fight, the Chinese believed.

“There is a real desire on our end to keep the tariffs on,” one White House official said. “That is a sticking point.”

Another major area of conflict has been how to deal with what the U.S. sees as Chinese recalcitrance on clamping down on the theft of U.S. intellectual property, said people briefed on the talks. The U.S. initially had sought to appeal to Mr. Xi’s nationalistic tendencies, arguing that if China was as great as Mr. Xi portrayed it, why would it need to steal U.S. technology?

The Trump administration believed it had an agreement that included a satisfactory level of enforcement should the Chinese record not improve. “Not tiger teeth, but real enough to make a deal,” one of the people tracking the talks said.

Then Chinese officials said enforcement procedures would need to go through Chinese law-enforcement channels and couldn’t be guaranteed at the negotiating table, this person said, which U.S. officials didn’t view as a credible option.

In Beijing, as the talks approached, Chinese officials believed they had some leverage, The Wall Street Journal has previously reported, because they saw Mr. Trump’s public criticism of the Federal Reserve and his desire for lower interest rates as a sign that he was worried about the future course of the U.S. economy and therefore may be more eager to do a deal. It was a miscalculation on their part; Mr. Trump has long called for low borrowing costs and also has repeatedly cited the enduring strength of the U.S. economy.

President Xi also was encouraged by a pickup in Chinese growth—the result of Beijing’s aggressive stimulus policies—and by a perception that the American economy is about to enter a down cycle. “Time is on our side,” said a senior official in Beijing. On the home front, Mr. Xi is wary of a potential political backlash as a result of any perception that he is conceding too much to Washington.

Chinese officials were therefore caught off guard, three days before the Washington talks were scheduled, when Mr. Trump said on Twitter he would increase tariffs, to 25% from 10%, on the $200 billion in Chinese goods because he saw the Chinese backtracking—the original threat he had set for a March 1 deadline.

Shortly after Mr. Trump’s announcement of the tariff increase, Beijing’s trade negotiators, who had booked Air China tickets to Washington, received an urgent order: Stay put until further notice. “Looks like we’re not going,” one of them said early Monday morning.

Up until that moment, China’s leadership had expected the trip to bring months of negotiations to a close, according to Chinese officials close to the negotiation process, given that Chinese diplomats were already in discussion with their American counterparts about a possible summit between Messrs. Xi and Trump to finalize a trade agreement.

Now, the pressing question for Beijing became: Should it pull out of the planned talks to adhere to its longstanding public position that China doesn’t negotiate under threat? Or should China bite the bullet and still send the delegation to avoid a complete collapse of negotiations?

The Chinese side wanted more information from Washington before making the decision. But senior officials knew news of Mr. Trump’s tweets would inevitably cause market anxiety. The first order of business Monday morning: China’s central bank sped up a plan to release more funds for banks, a stimulus measure aimed at calming jittery investors and businesses.

State-backed funds were also instructed to buy what was necessary to prevent a free fall of shares. China’s Foreign Ministry spokesman released a statement at Monday’s regular press briefing that said only that the Chinese delegation was “preparing to travel to the U.S.” The spokesman didn’t say when the team would depart or give additional details.

On Tuesday morning, a group of officials at the vice minister level, including Liao Min, a trusted aide to Mr. Liu and a vice Finance Minister, and Wang Shouwen, a vice Commerce Minister, reached the conclusion the talks should proceed, a position endorsed by Mr. Xi though expectations of a positive result had fallen sharply.

The U.S. side made some calls that turned off the Chinese, too. By insisting that it wouldn’t remove any tariffs upon closing a deal, the U.S. gave Beijing little incentive to accept tough conditions. The U.S. position remained firm: no tariff removal until Beijing showed it would carry through on the commitments it made under the deal. On top of that, the U.S. wanted China to pledge not to retaliate if the U.S. were to reimpose tariffs if it found China in violation of some provisions.

Mr. Trump on Thursday let it be known he didn’t want the U.S. to appear soft on China, according to one person briefed on the matter.

The two days of negotiations went amicably nonetheless, according to people tracking the talks. Messrs Lighthizer and Mnuchin, who both were in the discussions, took Mr. Liu to a working dinner at the Metropolitan Club, a ritzy private club near the U.S. Trade Representative’s headquarters that is a Lighthizer favorite. Mr. Liu continued the talks on Friday despite the U.S. implementing the higher tariffs very early Friday morning.

Later that morning, Mr. Lighthizer greeted the Chinese envoy at the door of the USTR office—a gesture he rarely makes, but one which he could be sure would be captured by photographers and camera crews waiting outside.

By then, though, the U.S. team went into the talks not expecting to do a deal, figuring they would have a “non-meeting,” according to one person briefed on the discussions. U.S. officials at least wanted to make sure they didn’t leave with a complete break. The goal of the meeting was to be able to say the U.S. negotiators were still trying, this person said.

In an interview with Chinese media Friday, Mr. Liu disputed U.S. accounts that China reneged on commitments it had already made as part of the trade talks. “We are very clear that we cannot make concessions on matters of principle,” Mr. Liu said. “We hope our U.S. colleagues understand this.”

Trump Hasn’t Killed the Global Trade System. Instead, He Split it in Two.

Allies find relations modestly tweaked, despite the president’s rhetoric, while relations with China are entering a deep freeze

When Donald Trump entered the White House on a platform of defiant nationalism nearly two years ago, many feared he would dismantle the global trading system the U.S. and its allies had built over the past 70 years.

He hasn’t. Instead, he is presiding over its realignment into two distinct systems.

  1. One, between the U.S. and its traditional, democratic trading partners, looks a lot like the system that has prevailed since the 1980s: free trade with a smattering of quotas and tariffs like those Ronald Reagan once deployed.
  2. The second reflects an emerging rivalry between the U.S. and China carrying echoes of the Cold War. On trade, investment and technology, the U.S. is moving to undo some of the integration that followed China’s accession to the World Trade Organization in 2001.

There are two big questions hanging over this realignment. The first is deciding how far the U.S. is prepared to decouple from China. The U.S. has given China until March 1 to avoid higher tariffs by addressing complaints it discriminates against foreign companies and steals their technology. Mr. Trump is counting on a deal that avoids a trade war. But many in his administration and Congress don’t trust China to make the necessary concessions and would likely advocate a sharper break.

The second question is whether the U.S. can persuade allies to join a united front to contain China. Other countries don’t relish the choice. Their economic ties to China are far greater than they ever were to the Soviet Union during the Cold War.

Two years ago, it was easy to predict a grimmer fate for the global trading system. Mr. Trump campaigned as a protectionist willing to tear up trade agreements and raise tariffs to shrink the trade deficit and bring back factory jobs.

In his first week he withdrew from the unratified 12-nation Trans-Pacific Partnership. He prepared to pull out of the U.S.-Korea Free Trade Agreement (Korus) and the North American Free Trade Agreement. Earlier this year he imposed steep tariffs on imports of steel and aluminum, using a little-used national security law, and threatened the same for autos.

Today, Korus and Nafta have been replaced by updated agreements(one not yet ratified) that look much like the originals. South Korea accepted quotas on steel. Mexico and Canada agreed to higher wages, North American content requirements and quotas for autos.

These represent a step back from free trade toward managed trade, but they will have little practical effect: The limits on how many cars Mexico and Canada can ship duty-free to the U.S., for example, exceed current shipments. Mr. Trump hasn’t stopped threatening auto tariffs, but for now his officials have elected instead to seek broader tariff reductions with Japan and the European Union.

.. Meanwhile, the U.S. trade deficit that incenses Mr. Trump has grown during his presidency, especially with China and Mexico, as a strong American economy sucks in imports. His exhortations to manufacturers to bring jobs back to the U.S. have largely fallen on deaf ears.

Douglas Irwin, an economist and trade historian at Dartmouth College, calls these results the “status quo with Trumpian tweaks: a little more managed trade sprinkled about for favored industries. It’s not good, but it’s not the destruction of the system.”

.. Yet the status quo with China is crumbling. Businesses have grown disillusioned with China’s restrictions on their activities, forced technology transfer and intellectual-property theft, all aimed at building up domestic competitors at foreign expense. Meanwhile, legislators in both parties are alarmed at increased military assertiveness and domestic repression under President Xi Jinping.

.. When Mr. Xi visited the U.S. in 2015, Mr. Sullivan urged his colleagues to pay more attention to China’s rise. On the senate floor, he quoted the political scientist Graham Allison: “War between the U.S. and China is more likely than recognized at the moment.”

Last spring, Mr. Sullivan went to China and met officials including Vice President Wang Qishan. They seemed to think tensions with the U.S. will fade after Mr. Trump leaves the scene, Mr. Sullivan recalled.

“I just said, ‘You are completely misreading this.’” The mistrust, he told them, is bipartisan, and will outlast Mr. Trump.

While delivering one message to China, Mr. Sullivan gave a different one to the administration and its trade negotiators: Don’t alienate allies needed to take on China.

“Modernize the agreements but stay within the agreements,” he says he counseled them. “Then we have to turn to the really big geostrategic challenge facing our country and that’s China.”

His was one voice among many urging Mr. Trump to single out China for pressure. Presidents Obama and George W. Bush sought to change China’s behavior through dialogue and engagement. Obama officials had begun to question engagement by the end of the administration. Last year, in its National Security Strategy, the Trump administration declared engagement a failure.

The Trump administration regards economic policy and national security as inseparable when it comes to Beijing, because China’s acquisition of Western technology both strengthens China militarily and weakens the U.S. economically.

The administration has yet to publicly explain its goals. In 1946, at the start of the Cold War, diplomat George Kennan made the case for containing the Soviet Union in his famous “long telegram.” The Trump administration hasn’t done anything comparable for China. One reason might be that administration officials are divided. Mr. Trump appears torn between wanting to halt China’s rise at any cost and hoping for “a big and very comprehensive deal” that lifts the cloud of a trade war.

.. U.S. and domestic concerns have prompted Australia, New Zealand, Japan, Britain and Canada to restrict or consider restricting Huawei equipment in their telecom infrastructure, in particular for the next 5G mobile phone standard.

The U.S. is also seeking to wall China off from future trade deals. It insisted the pact replacing Nafta include a clause letting the U.S. quit if either Canada or Mexico signs a free-trade agreement with a “non-market economy,” i.e., China.

.. The first goes to the heart of Mr. Trump’s goal. If his aim is to hold back China’s advance, economists predict he will fail. China’s innovative capacity has expanded dramatically. China now accounts for 18.6% of articles in international scientific journals, according to one study, and nearly a quarter of global venture-capital investment, according to another.

Indeed, some China experts fear that the U.S., by adopting a more adversarial approach, weakens China’s reformers and strengthens its nationalist factions, making conflict more likely. They predict China will intensify its pursuit of technological self-sufficiency.

.. Persuading other countries to hold China at arm’s length will be harder than containing the Soviet Union. China accounts for 11% of world exports, whereas the Soviet Union in the 1980s accounted for less than 3%,

.. China is 22% of Japanese imports and exports; the Soviet Union was less than 1%.

.. Many of China’s close neighbors depend far more, economically, on China than on the U.S.

.. U.S. officials note that China’s aid, such its Belt and Road infrastructure program, often saddles recipients with debt. Yet the U.S. offers no alternative, said Mr. Rudd.
.. Some of Mr. Trump’s trade policies undermine the united front he wants against China. He hasn’t sworn off protectionism against U.S. allies, promising to withdraw from Nafta even if its replacement isn’t ratified by Congress. His steel and aluminum tariffs, most of which remain in place, outraged such allies as Canada.

U.S. officials play down such frictions as easily worked out. Abroad, they are seen as more serious. Canadian ambassador to the U.S. David MacNaugton said he told U.S. trade negotiators that if Mr. Trump carried through on his threatened 25% tariff on Canadian autos, it would fundamentally change bilateral relations for the worse for years to come. In a letter accompanying Nafta’s replacement, the U.S. agreed not to levy the tariffs.