China Resists Trump Deficit Demand, Agrees To Buy More US Goods

Update: as reported earlier on Saturday, the White House indeed confirmed that China has agreed to purchase more US goods - an agreement that is toothless as i) it is unenforceable and ii) the only way to validate it is in retrospect - although as noted earlier Washington didn’t mention the $200BN deficit reduction desired by Donald Trump, suggesting the Trump admin once again was forced to back down, which we expected with the "elimination" of Peter Navarro.

"There was a consensus on taking effective measures to substantially reduce the United States trade deficit in goods with China," the joint US-Chinese statement, issues after the talks, read. “To meet the growing consumption needs of the Chinese people and the need for high-quality economic development, China will significantly increase purchases of United States goods and services. This will help support growth and employment in the United States.”

Beijing made another meaningless promise, saying it will amend its laws and regulations regarding intellectual property, including the Patent Law, in order to encourage more US purchases. Not a single Chinese company will buy more US goods as a result of this "change."

The US will now send a team to China to work out the details of the agreement as the sides vowed to “seek to resolve their economic and trade concerns in a proactive manner.”

In other words, can has been kicked, and a full-blown trade war averted, while the prior status quo has been extended indefinitely.

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After much anticipation that following Trump's ZTE gamble, China may relent in the ongoing trade war - stoked in no small part by Larry Kudlow's false statement that Beijing had offered to reduce the US trade deficit by "at least $200 billion" - on Friday the U.S. and China wrapped up the second day of trade talks, and while Beijing made a vague, unenforceable commitment to buy more U.S. goods and services, it resisted Trump's core demand that it cut by more than half the $375BN bilateral trade deficit.

According to the WSJ, while the Chinese were wary of committing to specific purchases - even though Kudlow also said China would buy more farm products, energy and financial services - they continue to look for a way to ease trade tensions between the two nations even if it means with token promises and gestures.

That said, there was one tangible achievement: late on Thursday, Beijing ended an antidumping probe into imported U.S. sorghum - used for feeding livestock and brewing alcohol - which had shut down U.S. sales to China. As a reminder, a month ago, on April 17, China slapped a 179% tariff on US sorghum just hours after the US banned exports to China's telecom giant, ZTE. China’s Commerce Ministry said earlier that punitive measures on purchases of the crop would “affect the cost of living for consumers” in China. On Friday, China’s Commerce Ministry said it would return the deposits in full while announcing the end to the probe, essentially removing the penalties on U.S. sorghum producers.

The decision however has wider implications: it is a direct tit-for-tat in the ongoing discussion over the fate of ZTE sanctions, and as the WSJ wrote previously, the two sides have been negotiating a deal for the U.S. to ease sanctions on China's blacklisted company. In exchange, China would end recent restrictions and tariffs on U.S. agricultural products.

Currently the Commerce Department forbids U.S. companies from supplying parts to ZTE. Mr. Kudlow said that the U.S. was considering easing the punishments. Alternative sanctions could include changing senior management and board members, Mr. Kudlow told Fox Business Network. Such changes “would be very harsh,” he said.

As such, all that was achieved this week was for China to overturn a policy it implemented a month ago in response to an enforcement action that Trump similarly enacted in mid-April.

At the same time, one of Washington’s central demands - that China reduce its merchandise trade surplus with the U.S. of $375 billion by at least $200 billion by the end of 2020 - remains unaddressed, even though economists in both nations say that the trade deficit is affected by investment and savings patterns in both nations, not trade policy, and as such it isn't feasible to be changed with the stroke of a pen absent dire economic consequences. Beijing has rejected U.S. demands in the past and has continued to hold firm, said the people briefed on the talks.

As previously noted, on Friday commentary posted bu Xinhua News Agency said that the "offer" to cut China's trade surplus with the U.S. was fake news and was "nonexistent" and that reports that China accepted the U.S. demand to narrow the trade gap are “purely a misreading." also known as fake news.

The article said that China will "never negotiate under the conditions set by the U.S." and added that "two sides made progress in areas such as the U.S. allowing more exports of technology products including semiconductors, as well as lifting restrictions on energy exports" but stressed that "China won’t make unilateral concessions."

As a result, while both sides have quietly agreed to drop the demand that the deficit be slashed, the new demand the US has pivoted into is for Beijing to buy more US goods and services, which is great except for the problem that there is no way to enforce it.

The U.S. Agriculture Department recently asked agriculture companies to come up with a list of products whose production could be ramped up rapidly for export to China, said a person following the talks. At the same time, China put together a list of high-tech products that are barred by U.S. export controls for sale to China but are allowed by other nations. Beijing argues that if the U.S. would ease the export controls on these items, it would purchase more from the U.S., the person briefed on the matters said.

Even so, some U.S. officials believe, the additional Chinese purchases would only total $50 billion to $60 billion in the next year or two, far short of the U.S. goal.

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Meanwhile, as trade discussions continue, the escalating trade war is starting to bite as growing tensions start hurting businesses in both countries. U.S. goods, from sorghum and soybeans to cars, have faced growing hurdles when entering China, while a U.S. order banning American companies from selling components to ZTE threatens to cripple the telecommunication-equipment producer and other state- owned Chinese companies, potentially resulting in the one thing Beijing fears the most: rising unemployment.

The WSJ also had some more details on the member of the Chinese delefation, including the country's Vice Premier Liu He, who has been rapidly rising in China's power ranks and is seen as China's shadow power broker to the world, and who impressed Washington officials, said Kudlow, calling Liu a “smart guy, a market guy,” in a brief interview with White House reporters.

He said Mr. Liu met with President Trump on Thursday in the Oval Office and gave “an excellent presentation” involving reductions in Chinese tariffs and other measures. Mr. Trump became “much more optimistic than I have ever seen,” said Mr. Kudlow on Fox Business Network

Ultimately, the fate of the trade war is up to Trump, and the tone he adopts: early this week, Trump said he would try to make sure ZTE got back in business, which has since led to a number of conciliatory gestures from Beijing. China’s antitrust regulators had delayed for months U.S. private-equity firm Bain Capital’s $18 billion deal for Toshiba Corp.’s memory-chip unit, but on Thursday the Japanese firm said regulators had allowed the deal to proceed. Chinese regulators also promised early this week to restart their review of U.S. chip maker Qualcomm Inc.’s bid for NXP Semiconductors NV, sending the price of NXP stock soaring and preventing a round of (metaphoric) suicides among the US hedge fund community where NXP is one of the largest M&A arbs around.

In return for relief on ZTE, China - which is one of the world's biggest importers of US farm products - would agree to hold back penalties on a variety of U.S. agricultural products it announced in early April as retaliation for U.S. tariffs on Chinese steel and aluminum exports.

Finally, with the recent "elimination" of Peter Navarro from Trump's inner circle of advisors, it appears that the trade war with China - which erupted right after Navarro's unexpected promotion in the Trump administration, and resignation of Gary Cohn - is about to return to its prior, dormant state as the status quo wins again and US trade relations with Beijing - for better or worse - remain virtually unchanged.