As economic envoy Liu He prepares to touch down in Washington, he faces what can only be described as the China conundrum. Ahead of him will be four days of trade talks littered with challenges and contradictions.
Key to this will be addressing White House concerns about the ballooning trade deficit, which was a record US$375.2 billion last year, and demands by the United States to cut it by $200 billion by the end of 2020.
Along with that herculean task, Liu must also tackle the problem of Chinese subsidies for advanced technology industries. The topic became a major stumbling block during the opening discussions with Treasury Secretary Steven Mnuchin in Beijing a few weeks ago.
This was hardly surprising as it strikes at the very heart of one of President Xi Jinping’s big picture programs, ‘Made in China 2025’, which aims to turn the world’s second-largest economy into a technological powerhouse.
“There are things China listed and said, ‘We’re going to take technology, spend several hundred billion dollars, and dominate the world’,” Robert Lighthizer, the US Trade Representative, told senators at a Washington hearing in March. “And these are things that if China dominates the world, it’s bad for America.”
Putting together a loose understanding is highly possible when Liu discusses the broad issues with Mnuchin, but the core differences are likely to remain.
The ZTE saga has highlighted the diplomatic minefield ahead after a US sanctions ban on components crippled the telecom giant. Even Trump’s U-turn at the weekend to help the group “get back into business” was seen as just another bargaining ploy.
In the end, Xi’s administration will concentrate on weaning the country’s prestigious tech companies, such as Huawei, Xiomei and Oppo, off imported US microchips. Again, this approach will only increase trade tensions in the years ahead.
“China is trying to achieve a clear goal and America wants to stop it,” Andrew Polk, the co-founder of Trivium/China, a research firm specializing in politics and economics in Beijing, said. “And that’s where the competition is.”
Coming up with a compromise will be difficult and probably painful. But the prospects of a full-blown trade war are considered too horrific to contemplate as the fallout would descend on the entire global economy.
The opening shots have already been fired after the US and China rolled out proposed tariffs on a range of imported products, worth a combined $100 billion, in the past few months.
Washington has even threatened to raise the ante by proposing further duties on another $100 billion-worth of goods.
“To reach a consensus between China and the US, it will be necessary to see things from the point of view of the US, and to try to find ways to reduce the bilateral trade imbalance,” Xu Qiyuan, a senior fellow with the Institute of World Economics and Politics at the Chinese Academy of Social Sciences in Beijing, said.
“At the same time, methods should be adopted that will minimize the negative impact on China,” Xu added.
Squaring that circle will take all of Liu’s reputed negotiating skills.