US Won’t Continue Trade Talks Until China Commits To Ending Forced Tech Transfers

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Originally appeared at ZeroHedge

Two days ago, the algos driving trading in US equity futures markets largely ignored a pre-open headline reporting that President Trump would meet with Chinese President Xi Jinping at the G-20 – dashing the hopes of administration officials who probably hoped their strategic leak would help push stocks higher at the open. Sadly, stocks ignored the latest “on again” signal in what has become a tedious back-and-forth (so much so that even the algos have learned to ignore them). And with futures markets already in green on Thursday, it appears US government officials are up to their usual tricks as they try to goose the market at the open to prove that the Shocktober selloff, which hit its nadir on Wednesday as the S&P 500 and Dow crossed into the red YTD, will be remembered as little more than another dip to buy.

Fortunately for Trump, futures have similarly ignored (so far, at least) a WSJ headline Thursday morning reporting that Trump and China wouldn’t resume trade negotiations, which were abruptly halted in September when China cancelled a Washington trip by Liu He and Vice Commerce Minister Wang Shouwen, and have yet to resume. While Trump and Xi are still expected to meet on the sidelines of next month’s G-20 meeting in Buenos Aires, negotiations likely won’t make any progress unless the two sides can agree on a framework beforehand. The sticking point appears to be US demands that Beijing develop a proposal to address key US concerns such as forced technology transfers and other economic issues.

The impasse threatens to undermine a meeting between Presidents Trump and Xi Jinpingscheduled for the end of November at the Group of 20 leaders summit in Buenos Aires. Both sides had hoped the gathering would ease the trade tensions. U.S. businesses have been counting on sufficient progress at the meeting for the Trump administration to suspend its plan to increase tariffs on $200 billion of Chinese imports to 25% on Jan. 1, from the current 10%. Such a move would be a blow to U.S. importers and consumers.

Negotiations have been on hold since mid-September, when the Chinese canceled a trip to Washington after the U.S. announced levies on the $200 billion of Chinese imports. Since then, Beijing has sought to re-engage, including asking U.S. Treasury Undersecretary David Malpass to resume talks. He declined—with the backing of the White House trade team—until the Chinese present a formal offer, U.S. officials said.

“If China wants [the G-20 session] to be a meaningful meeting, we need to do the groundwork,” a senior White House official said. “And if they don’t give us any information, it’s just hard to see how that becomes fruitful.”

But, according to Chinese officials, the country’s negotiators are wary of handing over any concrete proposals because they fear Trump will try to box the in by leaking them to the press. After all, they’ve been burned before…

For Beijing, making a formal offer presents a number of risks, according to individuals briefed by the Chinese. First, it would reveal their negotiating position. Second, Beijing fears that Mr. Trump could make any offer public in a tweet or statement as a way to lock in any concessions by China.

There is history behind Beijing’s concerns. During negotiations over China’s entry to the World Trade Organization in 1999, President Clinton turned down an offer by China’s premier at the time, Zhu Rongji, that included deep concessions and a reorganization of the Chinese economy. The Clinton administration made Mr. Zhu’s offer public, hoping to prevent the Chinese from backsliding. Instead, Mr. Zhu was pilloried at home by hard-liners, and it took months of negotiations to finally convince China to accept a deal similar to the one it initially offered.

China’s ambassador to the U.S., Cui Tiankai, said Beijing wanted more discussions before it would table a specific offer. “People have to sit down together,” Mr. Cui said in an interview. “Then each side should make its own proposal.”

China is also concerned about Trump’s famously mercurial nature.

He said Beijing is wary of negotiating with the Trump administration because Mr. Trump rejected several previous offers after other senior U.S. negotiators indicated they would be accepted. “You cannot have some tentative agreement one day and reject it next day,” he said.

While the US is worried that China will try and string them along.

The U.S., for its part, is concerned China will string out negotiations and try to get pledges from Mr. Trump in a one-on-one session with Mr. Xi. That would produce agreements that ”sort of commit to things that will sound good but aren’t meaningful,” said the senior White House official, who added Mr. Trump wouldn’t fall for such a trap. The Chinese are well known for carefully preparing for meetings while Mr. Trump often trusts his instincts.

As a reminder, this is where negotiations left off.

Since the spring, the two sides have discussed the makings of a deal. During May talks in Beijing, U.S. negotiators handed their Chinese counterparts an eight-point list of demands, ranging from halving the $376 billion trade deficit to curtailing much of China’s subsidies for high-tech industries.

The Chinese divided the U.S. demands into 142 separate items, which they then placed into three categories, said individuals briefed on the Chinese discussions. Of the demands, 30% to 40% could be done immediately; another 30% to 40% could be negotiated over time; and 20% were off limits because they involve national security or other sensitive issues, they said. Informally named the “80/20 plan” or the “60/20/20 plan,” the idea was presented to the U.S. in mid-August negotiations, U.S. and Chinese officials said.

Still, that the market didn’t react on the news is understandable. After all, the Financial Times published a strikingly similar report earlier this month. Though that’s not to say that a delayed reaction could hit later this morning.

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