Will China make the economic changes US demands?

December 03, 2018 15:35
China and the United States agreed to suspend additional tariffs while they resume trade negotiations for 90 days. Photo: Reuters

The agreement reached in Buenos Aires by Donald Trump and Xi Jinping bought China a 90-day grace period, after which the United States would tighten the screws by sharply raising tariffs until Trump gets what he wants – a structurally transformed Chinese economy.

As Trump has made clear, the deal he seeks is one in which China would “open up their country to competition from the United States”. He is calling for structural changes in the Chinese economy, which currently disadvantages American businesses.

Significantly, a White House statement on the US-China working dinner says: “President Trump and President Xi have agreed to immediately begin negotiations on structural changes with respect to forced technology transfer, intellectual property protection, non-tariff barriers, cyber intrusions and cyber theft, services and agriculture. Both parties agree that they will endeavor to have this transaction completed within the next 90 days. If at the end of this period of time, the parties are unable to reach an agreement, the 10 percent tariffs will be raised to 25 percent.”

It is highly unlikely that the Chinese leader would have agreed to the language used by the White House in which China acknowledged, for example, that it was guilty of “forced technology transfer” and “cyber theft”. However, it does suggest that China is willing to accept some structural changes.

In an apparent attempt to save face, a report by Xinhua, the state news agency, cited the 19th party congress held last year. “Beijing is committed to deepening reform and furthering opening-up” as a result of decisions made at the congress, Xinhua reported. In the process of implementing such reforms, “some economic and trade issues that are of Washington’s concern will be solved”, Xinhua said.

In the absence of a joint communiqué, each side issued its own understanding of the agreement reached. The US issued a White House statement and the Chinese side issued several reports by Xinhua, the state news agency.

One Xinhua report said: “The Chinese side said it will work to open its market, expand imports and resolve economy- and trade-related issues in China-US relations in the process of a new round of reform and opening-up and in line with the needs of its domestic market and people.”

However, while the US side made clear its intention to increase tariffs on Chinese products if talks to transform the Chinese economy aren’t completed in 90 days, Xinhua simply reported that the two sides “agreed to avoid escalation of trade restrictive measures” without mentioning that it is only for 90 days.

China is likely to take some steps to accommodate the United States, but the question is whether it will go far enough and fast enough. After all, the party has been good at dodging its own pledges of economic reform.

For example, at the third plenary session of the 18th party committee in 2013, the party said that the market would play a decisive role in the allocation of resources. This hasn’t happened, even though it was reaffirmed by Xi himself last year.

According to Xinhua, while China will address American concerns, “the US side will actively address China's concerns on economic and trade issues”. It did not expand on these concerns, but China has called on the US to export more high-tech items to China. This appears highly unlikely, especially since the US is taking active steps to prevent key technologies from falling into Chinese hands through either trade or investments.

In addition to promising reforms, the White House disclosed that China also had “agreed to purchase a not yet agreed upon, but very substantial, amount of agricultural, energy, industrial, and other product from the United States to reduce the trade imbalance between our two countries”.

Trump, evidently pleased by Chinese promises, was willing to lavish praise on his Chinese counterpart.

The White House statement began by praising a “wonderful humanitarian gesture” by Xi, who has “agreed to designate Fentanyl as a controlled substance, meaning that people selling Fentanyl to the United States will be subject to China’s maximum penalty under the law”.

This is hugely important to Washington. The deadly synthetic opioid is easily bought online from so-called Chinese “laboratories” and mailed to the US. In 2017, 72,000 Americans died of drug overdoses.

It remains to be seen whether China will make the changes the US demands. The Chinese government is divided. About 20 years ago, then Premier Zhu Rongji used China’s entry into the World Trade Organization to force domestic reforms. Perhaps this time, Chinese reformers can again use external pressure to bring about changes that they agree are needed.

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Frank Ching opened The Wall Street Journal’s Bureau in China in 1979. He is now a Hong Kong-based writer on Chinese affairs.