28 December 2018

A Weakened China Tries a Different Approach With the U.S.: Treading Lightly

By Keith Bradsher, Alan Rappeport and Glenn Thrush

BEIJING — The recent arrest of a top Chinese tech executive at the Trump administration’s request seemed certain to provoke a geopolitical showdown pitting Beijing against Washington.

The detained executive is a daughter of one of China’s most admired business leaders. She helps run a company, Huawei, at the center of a global race to dominate the next generation of telecommunications technology. And her arrest, widely viewed inside China as a direct affront, comes at a time of already pervasive suspicion among the Chinese public and leadership that the United States wants to block China’s rise through a trade war.

Yet seemingly against the odds, Beijing decided to take a measured response to the Huawei incident. The Chinese leadership has compartmentalized the situation as a law enforcement dispute while making concessions on trade to help defuse tensions.

China’s tempered approach is born, in part, out of a position of weakness. The country’s economy is in a sharp downturn, putting political pressure on President Xi Jinping to reach a deal with President Trump. American officials recognize the leverage they now have, wielding tariffs to extract concessions that Beijing has long delayed or rejected altogether.

In recent weeks, Mr. Xi, who in his tenure has challenged the United States’ global dominance more directly than any Chinese leader since Mao Zedong, has followed through on a series of deals that he struck with Mr. Trump in Buenos Aires this month. He has begun lifting recently imposed barriers to imports of American food, energy and cars — even as the United States maintains tariffs on $250 billion worth of Chinese goods.

While the agreement was initially presented as a temporary truce in the trade war, both sides are pushing for a long-term deal that creates a framework for closer, more stable relations between the world’s two biggest economies. Vice Premier Liu He on Tuesday called the United States Trade Representative Robert E. Lighthizer and Treasury Secretary Steven Mnuchin to lay out an initial road map for negotiations, with the goal of face-to-face talks next month.

“The Chinese government really wants to negotiate a deal with the United States to calm down the conflict, not only because of economic difficulties right now in China but also for the sake of long-term relations with the United States,” said Tu Xinquan, the executive dean of the China Institute for World Trade Organization Studies in Beijing.

The trade truce, though, remains tenuous, and the negotiations could easily be derailed. While Beijing has made some overtures, it has not gone far enough to address some of the biggest sticking points for the hawks in the Trump administration, like forced technology transfers and the trade deficit. And the Huawei situation could easily escalate, putting pressure at home on the Chinese president to act.

Meng Wanzhou, the chief financial officer of Huawei, was arrested in Canada. She is a daughter of one of China’s most admired business leaders and helps run a company battling to dominate the next generation of telecom technology.CreditReuters

If nationalistic tempers flare, the relationship could suffer. In previous tense moments, a thaw has taken time.

When the United States accidentally bombed China’s embassy in Belgrade, Serbia, in 1999, the deaths of three Chinese citizens personalized the episode and triggered a wave of anger and indignation against the United States. The chill to Sino-American relations lasted for months, even though the Chinese leader at the time, President Jiang Zemin, had previously taken a friendlier approach with the United States than Mr. Xi.

The Huawei executive, Meng Wanzhou, was arrested in Canada on Dec. 1 at the behest of American authorities, who claimed she deceived financial institutions and caused them to violate sanctions against Iran. Huawei has said it is unaware of any wrongdoing on her part.

“If Ms. Meng is extradited to America, then it will be difficult for the government to control the public’s anger — then the government will have to be tougher on Canada and the United States,” Mr. Tu said.

Mr. Trump and his top trade advisers were pleased by the tenor of his dinner with Mr. Xi in Buenos Aires. The Chinese leader was deeply engaged in the conversation, eager to convince the Americans that he was willing to go further in accommodating their grievances than any of his predecessors.

Along with the agreement in Buenos Aires, China’s leaders are also preparing a series of moves to open up the economy to more trade and foreign investment, an overhaul timed to the 40th anniversary later this month of the country’s initial post-Mao economic reforms. Such moves, like further tariff reductions, would provide Mr. Xi an opportunity to introduce market-friendly measures without seeming to give in to American pressure.

It’s unclear what will satisfy the administration — and more important, Mr. Trump.

Mr. Mnuchin has pushed for an agreement that obtains some concessions quickly, in order to reduce the potential economic fallout of an intensified trade war. Mr. Trump, concerned about the volatility in the stock markets, wants to get a big deal done, while also avoiding anything drastic that would damage his relationship with Mr. Xi, according to several officials with direct knowledge.

But Mr. Trump’s economic advisers are also watching China with a high level of caution. Some, like Mr. Lighthizer, the top negotiator in the talks, are highly doubtful that China will do anything more than is necessary to remove the threat of new tariffs.

Beijing has a history of making promises it doesn’t keep or doesn’t fully implement. Some of the recent moves by China would provide superficial wins for the Trump administration, without requiring Beijing to substantially change anything.

The FAW-Volkswagen plant in Foshan, Guangdong Province, China. Many multinational companies are reconsidering their reliance on the country.CreditFreddy Chan/EPA, via Shutterstock

China has expressed a willingness to cut tariffs on American cars to 15 percent, from 40 percent. But that’s what China already charges the rest of the world; the higher tariffs were merely a retaliatory measure imposed after the United States started a trade war. And China still maintains a 16 percent value-added tax that applies to all cars, including imported ones.

When China’s cabinet issued updated mandates on Monday for local governments, one of Mr. Trump’s bugaboos was no longer on the list: Made in China 2025, a state policy to turn the country into a high-tech superpower. Instead the list outlined government backing for industrial upgrading and “technological transformation,” a more banal-sounding if similar plan.

David Malpass, Treasury’s under secretary for international affairs, said during a congressional hearing on Wednesday that the Trump administration would not accept promises from China without verification. “The proof is in the pudding,” said Mr. Malpass, who has engaged in midlevel negotiations with the Chinese. “There’s a desire within the discussions to have specificity, to have firm timelines and deadlines and enforceable kinds of conditions.”

Wilbur Ross, the Commerce secretary, said on CNBC on Wednesday that the Made in China initiative had provoked backlash from other countries but that he did not believe China was doing away with the program. “If you’ll search the recent clips, you’ll find they haven’t been talking that much about it,” Mr. Ross said. “That doesn’t mean they’ve dropped it.”

As the talks progress, China’s hand could ultimately be forced by economic weakness.

It’s hard to tell exactly how bad the economy has gotten in China. Many economists regard Chinese data as unreliable, and Beijing keeps a tight grip on information. But some sectors, like real estate and cars, indicate the plunge is getting steeper with each passing month.

Car sales plummeted faster this autumn than during the global financial crisis, an abrupt downturn that auto industry leaders attribute to a crumbling of business and consumer confidence triggered mainly by the trade war. Many multinationals are reconsidering their heavy reliance now on China, endangering the country’s ability to attract plentiful foreign investment and know-how in such industries.

“Without Volkswagen, China would not be No. 1 in auto production today,” said David Li, a prominent Tsinghua University economist, at a conference that the university hosted on Sunday to review policy lessons from the last 40 years, since China opened up after the death of Mao.

The trade war, the sharp slowing of the economy and the prospect of diminishing foreign investment have also precipitated drops in China’s stock market and currency this year. Those, in turn, appear to have weakened Mr. Xi’s popularity, at least within the country’s political and economic elite in Beijing and Shanghai. Complaints about his management, very seldom heard six months ago, have become unusually common in private conversations.

For Mr. Xi, balancing those internal and external pressures will be critical as China enters the next phase of negotiations. Whatever additional leverage the United States enjoys in the current talks is predicated on the threat of tariffs, and Mr. Xi, like Chinese negotiators before him, still believes Mr. Trump will blink, said Derek Scissors, a China scholar with the American Enterprise Institute in Washington.

The Huawei incident “doesn’t give Trump any additional leverage. The tariffs do, whether you think they are a good idea or not,” Mr. Scissors said. “And, based on what Trump has done so far, the Chinese think that we ultimately chicken out just like we have done every other time.”

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