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Trade talks expose a chasm between China and America

START with the good news from the trade negotiations between China and America. After weeks of threatening tariffs and counter-tariffs, representatives from the world’s two biggest economies are at last talking. Over two days of meetings in Beijing, which ended on May 4th, Chinese and American officials laid out their grievances and their demands. That, unfortunately, is where the good news ends. The positions that both sides took were so extreme and contradictory that compromise appears a remote prospect. What, until now, has largely been a war of words could easily careen into a full-fledged trade war.

Publicly, the two countries put a positive gloss on the outcome. Xinhua, China’s official news agency, described the talks as candid and constructive. It noted that they had agreed on some issues and recognised their “considerable differences” on others. On the evening the talks closed, President Donald Trump tweeted a sentiment that, by his standards, was sympathetic: “it is hard for China in that they have become very spoiled with U.S. trade wins” (that is, with beating America in the trade arena, which Mr Trump firmly believes China has).

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If those public statements were all observers had to go on, the conclusion might well be that the talks had been successful. Instead, the two countries’ detailed negotiating positions were widely leaked. It is clear that they have been talking at, rather than with, each other.

The American demand that made the most headlines was that China should cut its massive bilateral trade surplus by $200bn by the end of 2020. That would amount to a roughly 60% reduction in China’s surplus within three years, which is far from credible. But numbers are at least negotiable. More troubling from China’s perspective were demands focused on its economic policy. The Americans asked China to stop providing subsidies to a range of sectors that the Chinese government has deemed strategic, from robotics to electric vehicles. They demanded that Chinese tariffs on American products be no higher than American tariffs on Chinese products. And they told China to open its market much more widely to foreign investors, setting July 1st as a deadline.

Before travelling to Beijing, Robert Lighthizer, the United States Trade Representative (pictured, centre), had said his objective was not to change the Chinese system but to open it up. Taken in its entirety, though, the American position amounts to a demand for a new economic model in China. That Mr Lighthizer, long a China hawk, has taken a hardline stance is not surprising. But it was striking to see his views emerge virtually undistilled as the American position. Some had thought that doveish members of the American delegation, notably Steven Mnuchin, the treasury secretary, would make for a more moderate stance. So much for that.

China, for its part, also made a series of demands that were non-starters. To increase its purchases from America, it asked that the American government ease controls on exports of technology that could have military applications. These controls, in place for nearly three decades, are not about to be relaxed given that America has just classified China as a rival power. China asked that America open its market to Chinese information-technology products. America is going in the opposite direction, viewing more and more Chinese tech with suspicion.

China also asked that America recognise it as a market economy at the World Trade Organisation, lessening the scope for punishment in trade disputes. If America fails to do so, China said it would likewise treat America as a non-market economy at the WTO. Had the talks in Beijing gone well, it was expected that Xi Jinping, China’s president, or Wang Qishan, his trusted lieutenant on American relations, would meet Mr Trump’s trade team. No meeting took place.

The question about the duelling demands is to what extent they are simply aggressive opening moves. The countries might soften their stances as negotiations continue. But there is a chasm between them on foundational issues. China is determined to become a tech power, and is unabashed about using industrial policy to get there; America sees China’s advance as a threat and believes its industrial policies harm American companies. The American objection to China as a state-controlled economy cannot be squared with China’s insistence that it is already a market economy. The timeline is also tight. Starting on May 23rd, America can legally impose its first set of tariffs against China, affecting roughly $50bn of goods. China will retaliate without delay.

There were some glimpses of common ground, however limited. Both countries said they wanted to meet regularly. Both talked about wanting a balanced trade relationship, in which China buys more from America. But building on this common ground requires mutual goodwill, which is in short supply. Mr Trump and Mr Xi have tried to cultivate reputations as staunch defenders of their national interests. Now that their negotiating positions are publicly known, the worry is that the two leaders, unwilling to look weak, will dig in.

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