Illustration: iStock
Illustration: iStock

When the opening salvos were fired earlier this month, Liu He went to Washington to avert a trade war between China and the United States. At the top of his agenda was a simple question: “What do you want?”

He then urged President Donald Trump’s administration to hand over a detailed list of proposals and called for dialogue, and a dedicated “point person” he could deal with.

Three weeks later, the Harvard-educated vice-premier and new economic overlord in President Xi Jinping’s second-term government knows the answer to his first question.

“[We want China] to open up their markets, reduce their tariffs [and to] stop forced technology transfer. These are all the things we want to do,” Steven Mnuchin, the US Treasury Secretary, told Fox News.

“We are proceeding with these tariffs, we’re not putting them on hold unless we have an acceptable agreement that the president signs off on,” he added.

Relations between Beijing and Washington have been decidedly frosty since measures were rolled out last month to curb steel and aluminum imports from China.

Concerns about intellectual property rights have also been highlighted in the past two weeks. But now, the list has been fleshed out.

Foreign firms

On Monday, officials from President Trump’s team demanded that China cut tariffs on imported cars, as well as allowing access for foreign firms to own majority stakes in financial services companies. They also told the world’s second-largest economy to buy more US-made semiconductors.

Failure to agree would trigger a new round of punitive taxes on a host of Chinese goods, escalating trade tensions.

“We’re hopeful that China will work with us to basically address some of these practices,” Peter Navarro, the new White House trade adviser, told CNBC.

His comments came after the US media reported that a letter had been sent to Beijing last week outlining President Trump’s position.

The news boosted global markets after last week’s dramatic fall when the White House revealed plans to impose tariffs on up to US$60 billion of Chinese imports following claims that US intellectual property rights had been breached.

During the weekend, Xinhua news agency reported that Vice-Premier Liu had talked to Mnuchin on the telephone. He pointed out that the US sanctions had violated international trade rules and that “China would defend its interests,” the official mouthpiece of Beijing stressed.

“Secretary Mnuchin called Liu He to congratulate him on the official announcement of his new role,” a US Treasury spokesman told Reuters, which confirmed the call.

“They also discussed the trade deficit between our two countries and committed to continuing the dialogue to find a mutually agreeable way to reduce it,” he added but declined to comment further.

In January, China’s exports to the US jumped more than 46% to $21.8 billion, official data from the General Administration of Customs showed, more than double the $10.4 billion reported during the same period in 2017.

Still, the amount was a drop in the Pacific Ocean, which divides the two nations, when compared with the record $375 billion deficit the US racked up with China last year.

“The bigger picture is that while China’s trade surplus with most of the world has declined during the past year … its surplus with the US has continued to expand,” Julian Evans-Pritchard, the China Economist at Capital Economics, said in a note at the time.

Even Premier Li Keqiang has offered an olive branch in a bid to defuse the situation.

Speaking at this week’s China Development Forum in Beijing, he reiterated that access would be eased for US businesses as the country scrambles to avert a raft of new tariffs.

Trade imbalances

He also made it clear they would treat foreign and domestic companies equally, and beef up regulations on intellectual property rights. These promises, of course, have been made before and have failed to placate Washington.

“China’s integration with the world will continue to get deeper,” Li said. “With regard to trade imbalances, China and the United States should adopt a pragmatic and rational attitude, promote balancing through expansion of trade, and stick to negotiations to resolve differences and friction.”

Vice-Premier Liu has spoken in similar measured tones. “We hope to see both sides remain sensible and work together to preserve the overall stability of China-US trade relations,” he told Xinhua.

But even with the list he asked for safely in his top pocket, navigating through this economic midfield will be hazardous. Indeed, trying to rebalance a $375 billion trade deficit will require a Herculean effort.

“China may be able to come up with some big-ticket imports to allow it to appear to be [reducing] the bilateral trade imbalance,” Mark Williams, the chief Asia economist at research firm Capital Economics, wrote in a note to clients. “But China won’t be able to [trim] the annual imbalance by $100 billion as [President] Trump has demanded.”

As the stress levels rise, Liu will need more than a pocket calculator to work this one out.

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