U.S.-China faces chasm over structural economic reforms

China has done little to address core U.S. concerns on respecting and adhering to international standards on intellectual property rights and forced transfer of U.S. technology to Chinese firms. Unless there is a verifiable way to ensure Beijing sticks to its promises, the threat of U.S. tariff on Chinese exports to the U.S., is likely to remain.

On Wednesday, the United States and China launched a critical round of trade talks midst a deepening of differences over U.S. demands for structural economic reforms. Given the effect of the trade war on China’s economy, it is to Beijing’s interest to see that it can cover as much ground as possible before a March 2 U.S. tariff hike.

The 90-day truce in the trade war will end on March 2, 2019.

According to sources familiar with the ongoing talks as well as trade experts monitoring the negotiations, Chinese officials have done little to address core U.S. concerns of protecting and adhering to international standards on intellectual property rights, and forced transfer of U.S. technology to Chinese firms.

U.S. complaints include systematic use of cyber warfare to steal U.S. trade secrets by China. This is one of the reasons for the U.S. to impose tariffs on $250 billion worth of Chinese imports.

On March 2, contingent on not reaching an agreement, Trump has threatened to raise tariffs on $200 billion from their current 10% to 25%. Trump has also threatened to impose new tariffs on the remainder of Chinese goods exported to the United States.

“Clearly on the structural concerns, on forced technology transfer, there remains a significant gap if not a wide chasm between the two sides,” said a source familiar with the talks.

With China having a massive trade surplus with the U.S. and with its economy feeling the brunt of the U.S. trade tariffs which resulted in its car market contracting to their 30 year low, despite its face saving trade tactics, China is facing the result of its coercive economic policies.

As part of this strategy, Chinese officials have completely denied the existence of their policies to coerce technology transfers. They have instead emphasized on the steps they have already taken, including decreasing automotive tariffs and a draft foreign investment law that improves access for foreign firms and promises to outlaw “administrative means to force the transfer of technology.”

This feeble attempt at negotiation using only a draft foreign investment law, which amounts to nothing tangible is what is pushing top U.S. administration officials to create a mechanism in order to verify and “enforce” China’s pledges on its reforms.

This only is likely to mean that the U.S. could maintain the threat of imposing further tariffs on Chinese goods on the long term.

TEMPERED EXPECTATIONS

For business group monitoring the negotiations, the expectations of a breakthrough were dashed by China’s lackluster maneuverings peppered by fiery rhetoric.

“I don’t think there’s going to be any big outcome,” said Erin Ennis, senior vice president of the U.S.-China Business Council, ahead of the scheduled talks for Wednesday and Thursday.

“Hopefully they make some good progress that will set them up to be able to get to completion at the end of the 90 days,” said Ennis.

The Chinese side, led by Vice Premier Liu He, will have to place a new offer on the table which is materially different from its previous offers to significantly increase purchases of U.S. goods, including soybeans, energy and manufactured goods.

With China not matching its words with its practice, U.S. officials have developed misgivings on China’s pledges to buy more U.S. goods so as to trim trade deficit between the two countries. U.S. officials say, there are “no guarantees” that Beijing will follow through on its pledges.

According to Nicholas Lardy, a senior fellow and China trade expert at the Peterson Institute for International Economics in Washington, the earnings of U.S. firms dependent on the Chinese market for their financials as well as Chinese firms, have taken a beating.

“Given the weakness in the Chinese economy and the fact that the U.S. will certainly be slowing down, that’s not a pretty picture,” said Lardy.

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