China Softens Tone on Trade After U.S. Leaves Empty Handed

(Bloomberg) -- China tried to strike a positive tone after Donald Trump's trade negotiators left Beijing Friday with no public sign of an agreement, reiterating that the U.S. shouldn't make unreasonable demands.

State media over the weekend offered a somewhat positive assessment of the U.S. trade talks, urging more negotiations while saying the Americans should be “rational and pragmatic.” And in a move that would meet some U.S. demands, the Commerce Ministry is studying measures to further lower import tariffs on some food, pharmaceuticals and medical instruments, Economic Information Daily reported Monday, citing unidentified people.

“In the next couple of months, we expect continued negotiations will likely result in a scale-back of the current proposal on tariffs as China quickens its implementation of some announced opening and reform measures,” UBS Group AG chief China economist Wang Tao said in a note. “As a result, we expect any direct impact on exports and economic growth from higher tariffs will be limited.”

China is scheduled to report April trade data Tuesday. Possible U.S. trade measures may impact Chinese exports later this year, Jing Ulrich, Asia-Pacific vice chairman JPMorgan Chase & Co., said Monday at a media briefing in Beijing.

Two days of discussions ended Friday in Beijing with an agreement to keep on talking but little else, leaving the U.S. threat of tariffs on as much as $150 billion of Chinese imports still in play. The list of demands from each side, seen by Bloomberg News, showed just how wide the gulf between the world's two biggest economies remains.

The U.S. wants China to cut its annual trade surplus by $200 billion by the end of 2020 and not retaliate against U.S. tariffs. It also wants a halt to subsidies and other government support for its Made in China 2025 plan that targets global domination in strategic industries from robotics to new-energy vehicles.

China's demands included asking the U.S. to stop an investigation into the country's acquisition of sensitive American technologies, adjust an export ban on ZTE Corp., and lift bans on exports of integrated circuits to China.

The U.S. approach was “all stick, no carrot,” said Stephen Roach, author of the 2014 book “Unbalanced: The Codependency of America and China” and former chairman of Morgan Stanley Asia. “America threatens from a position of weakness and strategic miscalculation that can only backfire,” said Roach, now a senior fellow at Yale University.

The “softening tone” at the talks is welcome as it gives room for further discussions to find common ground, the state-run China Daily newspaper said in an editorial Friday. But it rebuffed the U.S. call to quickly slash its trade surplus, saying it can only be reduced gradually, not through “unilateral, ill-thought-through trade actions,” it said.

“Making China a scapegoat for the ills of the U.S. economy may appease some uninformed voters, but it would hardly reduce the trade deficit,” it said. “China will further open up its economy so the international community can benefit from its large and fast-developing market. But China will do so on its own conditions, not to suit the agenda of other countries.”

Structural Issue

The trade balance with the U.S. is a long-term, structural issue that must be tackled rationally, People's Bank of China Governor Yi Gang said in an interview with business magazine Caixin last month and follow-up written responses.

Yi Says PBOC Not Intervening in Yuan, Trade Gap Is Long Term

Tensions between the nations flared anew in another area as the White House called a China's order for airlines to stop referring to Taiwan, Hong Kong and Macau as countries “Orwellian nonsense.” The foreign ministry said Sunday that all three places are part of China's territory. Hong Kong and Macau answer to Beijing despite having different currencies and local governments, while Taiwan is a democracy that has resisted rule by the mainland.

UBS's Wang said she doesn't expect all core trade differences to be resolved, meaning lingering tension and uncertainty will likely weigh on China's export orders and related business investment. If that slowdown is notable, she expects the current credit tightening policies, especially those related to infrastructure investment, may be relaxed or reversed.

One of the Trump administration's biggest fears is that China swamps industries from artificial intelligence to aircraft manufacturing in the same way it did steel and aluminum previously, shutting the U.S. out of sectors in which it now holds an advantage, former Reserve Bank of India Governor Raghuram Rajan said in a Bloomberg Television interview.

“I'm not saying there's no reason for concern in industrial countries, but I think there are ways of making this work much better,” said Rajan, now a professor at the University of Chicago. “It shouldn't be driven primarily by a fear of China. It's going to be hard for China to stay at the frontier of these areas. There is room for a win-win discussion.”

--With assistance from Miao Han and Kathleen Hays

To contact Bloomberg News staff for this story: Kevin Hamlin in Beijing at khamlin@bloomberg.net.

To contact the editors responsible for this story: Malcolm Scott at mscott23@bloomberg.net, Jeff Kearns, Karthikeyan Sundaram

©2018 Bloomberg L.P.

With assistance from Kevin Hamlin