China scrambles to sustain its trade truce with America
THEIR WORDS were guarded, their tone sober. At a Politburo meeting to discuss economic plans for 2019, China’s top leaders agreed that they should be ready for problems and must, above all, maintain domestic stability. It was a striking contrast with the same meeting a year earlier. Then the Politburo oozed confidence, concluding that China was the world’s economic engine, with a new level of power.
This nervous, inward turn explains why, after a year of eye-for-eye fighting with America, China is determined to bring the trade war to an end. The view, once commonly heard in Beijing, that it could outlast America in a grinding tariff battle has given way to the realisation that, as the country with the huge trade surplus, China has more to lose upfront. Optimism that the government could fight on two fronts—taming its heavy debt burden at the same time as taking on America—has also cracked. The economic outlook has darkened. Analysts are debating whether the government will, once again, deploy a big fiscal stimulus to prop up growth.
So the swagger from a year ago is being replaced by more conciliatory messages. At a recent forum Ma Jiantang, vice-president of a think-tank under the cabinet, emphasised the deep ties between China’s and America’s economies. “We are inseparable,” he said. The immediate goal for Chinese officials is to sustain the trade truce that Presidents Donald Trump and Xi Jinping agreed to after the recent G20 summit in Argentina. They have until March 1st to reach a deal, otherwise the two countries may hit each other with tariffs again.
China’s peace offering is starting to come together. The government has made or hinted at a series of concessions over the past two weeks. It has resumed purchases of American soyabeans, announced tariff cuts on auto imports and indicated that it will modify an industrial policy that stokes suspicion abroad. This is the most notable series of steps taken by China to respond to America’s trade gripes. Whether they will satisfy Mr Trump is another matter.
The early signs are that he likes what he sees on the table. On December 14th, after the Chinese state council said it would temporarily cancel an extra 25% import tariff on American cars (imposed in retaliation for American tariffs), Mr Trump tweeted with glee. “China wants to make a big and very comprehensive deal. It could happen, and rather soon!”
But Chinese negotiators are not about to uncork fine bottles of moutai just yet. One wild card is Meng Wanzhou, the finance chief of Huawei, a Chinese tech giant, who was detained by Canada on an extradition request from America. China has tried to insulate her case from the trade talks. Conveniently, it has been able to focus its ire on Canada, detaining two Canadian citizens in China as thinly veiled revenge. But if Canada does hand Ms Meng to America, the truce would come under strain. Moreover, America might pick new fights. The justice department is reportedly set to indict Chinese hackers over economic espionage.
China has also learned that Mr Trump is an unpredictable combatant, torn between two camps within his administration. Doves such as Steven Mnuchin, the treasury secretary, supported previous offers by China to buy more American energy and agricultural products. Hawks, especially Robert Lighthizer, the United States Trade Representative, have wanted more, demanding that China halt practices that allegedly let its firms pilfer technology from America. And it is not just the hawks. James McGregor, head of China for APCO Worldwide, a consultancy, says that foreign businesses want to see “serious results”, having endured all the tariff drama.
The crucial question is therefore what kind of results China can deliver. Reducing tariffs on auto imports and buying soyabeans should not count for much. Those measures merely return the trade relationship to its position a year ago. But demands for fundamental change are much harder for China. They cut to the heart of its economic model, potentially requiring it, for example, to curtail subsidies for state-owned companies.
Chinese negotiators are focusing on two themes, according to people familiar with the talks. First, they are walking away from the “Made in China 2025” plan, a blueprint for turning the country into an advanced manufacturing power. Foreign businesses object to it because it specifies market-share targets for China in sectors from biotech to robotics. Chinese officials have already downplayed its significance, describing it as a vague, aspirational document. References to it have all but vanished from state media. Now, the government appears ready to rescind it formally. Even the Global Times, a nationalist state-owned tabloid, has called for a new plan.
Second, the government wants to show that foreign companies play on a level field. Liu He, the lead Chinese trade negotiator, has asked the central bank to devise guidelines for how “competitive neutrality” would work in China, according to someone briefed on the project. The idea, promoted by the OECD rich-country club, is that state-owned companies can form part of a healthy market economy provided they enjoy no special advantages. China will try to convince Mr Trump that it is serious about meeting this standard.
China is matching its words with actions—up to a point. After a flurry of approvals, it can argue that it is opening its economy to foreign firms. Tesla is on track to be the first foreign carmaker to have a wholly owned manufacturing facility in China. UBS, a Swiss bank, recently became the first foreign firm to be allowed a majority stake in a Chinese brokerage. ExxonMobil will soon start to build a wholly owned petrochemical complex, which until recently foreign firms could not do. China has also published tougher rules for protecting intellectual property, which foreign companies have long demanded.
Placating American negotiators will, however, be difficult. The challenge for China is to prove that these are more than cosmetic changes to an economic system in which the state remains overwhelmingly powerful. Scepticism abounds. As long as the government wants to build state-owned companies into global powerhouses, foreign rivals will have good reason to think that the deck is stacked against them in China.
On December 18th China celebrated the 40th anniversary of the start of its “reform and opening” period, the rebirth of the economy following Mao’s disastrous rule. Some had hoped that Mr Xi would use the occasion to launch bold new reforms. But in a speech at the Great Hall of the People in Beijing, he instead reflected on how far China had come, guided by the Communist Party’s strong hand. A humble veneer cannot conceal China’s pride in its own success over the past four decades, even if the past few months have been turbulent. It is reluctant to junk and replace what it sees as a winning formula.
This article appeared in the Finance and economics section of the print edition under the headline “Peace offering”