Trade threats press China to change or suffer consequences

BEIJING—By threatening to raise taxes on Chinese imports, President Donald Trump is throwing down a challenge to Beijing: Agree to sweeping changes in China’s government-dominated economic model—or suffer the consequences.

The unexpected ultimatum, delivered via tweets on Sunday and Monday, shook up financial markets that had expected the world’s two biggest economies to resolve a yearlong standoff over trade, perhaps by the end of the week.

“It’s a significant change in the president’s tone,” said Timothy Keeler, a partner at the law firm Mayer Brown and former chief of staff for the U.S. Trade Representative. “It certainly increases the possibility that you’ll have no deal.”

For weeks, Trump administration officials had been suggesting that the U.S. and Chinese negotiators were making steady progress. A Chinese delegation is due to resume talks Wednesday in Washington.

Related: China says trade envoys preparing to go to Washington [Canadian Manufacturing]

Suddenly on Sunday, Trump said he had lost patience: “The Trade Deal with China continues, but too slowly, as they attempt to renegotiate. No!” he tweeted.

The president vowed to raise tariffs on US$200 billion in Chinese imports from 10% to 25% on Friday. And he said he planned “shortly” to slap 25% tariffs on another $325 billion in Chinese products, covering everything China ships to the United States.

Michael Pillsbury, director of the Hudson Institute’s Center on Chinese Strategy and an adviser to the Trump White House, said the president’s tweets suggest frustration that Chinese leaders “are trying to take back concessions they already made.”

The two countries are engaged in high-stakes commercial combat over China’s aggressive push to establish Chinese companies as world leaders in cutting-edge fields such as robotics and electric vehicles.

The United States accuses Beijing of predatory practices, including hacking into U.S. companies’ computers to steal trade secrets, forcing foreign firms to hand over technology in exchange for access to the Chinese market and unfairly subsidizing Chinese firms at the expense of foreign competitors.

The Trump administration has imposed 10% tariffs on $200 billion in Chinese imports and 25% tariffs on another $50 billion. The Chinese have retaliated by targeting $110 billion in U.S. imports.

Global stock markets sank Monday on Trump’s tweetstorm. But shares in the United States regained some of the lost ground on news that Chinese officials were planning to go ahead with this week’s meetings in Washington. Still, the Chinese government did not provide details on exactly when talks would resume and who would be on China’s negotiating team.

The lack of details suggested that Beijing is wrestling with an internal conflict: It is eager to end a trade fight that has battered Chinese exporters, but it doesn’t want to look like it’s bowing to the Trump administration’s demands for far-reaching concessions.

Trump’s threat makes going ahead with talks “very difficult politically” for President Xi Jinping’s government, said Jake Parker, vice-president of the U.S.-China Business Council. He said the Chinese public might “view this as a capitulation” if Beijing reached an agreement before Trump’s Friday deadline.

The conflict is testing how far Beijing is willing to go in changing a state-led economic model it sees as the path to prosperity and global influence—and how much power Washington will have to enforce any agreement.

Beijing is willing to change industrial plans that provoke foreign opposition but wants to preserve the ruling Communist Party’s dominant role in directing economic development, said Willy Lam, a politics specialist at the Chinese University of Hong Kong.

Chinese officials have said they are willing to let foreign companies participate in plans that call for government-led creation of global competitors in robotics and other technologies. But they have yet to release details, and it is unclear whether the concessions will satisfy Trump.

Xi is “adamant about party-state control over major sectors of the economy,” Lam said. “If they give this up, then China in effect ceases to be a socialist country.”

Beijing agreed early on to narrow its trade surplus with the United States—a staggering $379 billion last year—by purchasing more American soybeans, natural gas and other exports.

At the same time, Xi’s government has announced a steady drumbeat of promises to open markets—in businesses that include auto manufacturing and banking. But none of the moves directly addresses American complaints.

The negotiators are also looking for a way to hold Beijing to any commitments it makes. The Trump administration wants to keep tariffs on Chinese imports to maintain leverage over Beijing.

“Trump wants a certain amount of tariffs to remain in place just in case the Chinese don’t honour their promises,” Lam said. “The Chinese refuse to give the Americans the right to penalize them.”

The Chinese are also skittish about allowing Washington to dictate changes to industrial policy and subsidies, said Raoul Leering, a trade specialist for Dutch bank ING. They see that as “having another country decide your economic policy.”

Trump also seems to be calculating that Xi needs a deal more than he does. The Chinese economy is decelerating. “Trump believes he can bully the Chinese,” Lam said. “Trump realizes the Chinese economy is facing a rough patch, and Xi Jinping is under pressure from his own people.”

But Trump also has an incentive to reach a deal. The trade war is creating uncertainty for businesses trying to decide where to buy supplies, locate factories and make investments. And it’s been weighing on a strong U.S. stock market, which the president likes to tout as evidence that his economic policies are working.

“We are optimistic generally on reaching an agreement,” said Jason Oxman, president of the tech trade group the Information Technology Industry Council. “We’re optimistic that an agreement can be mutually beneficial.”

Threats from Trump are “just the way he likes to negotiate,” Leering said. “That is a risky but potentially rewarding strategy—so long as the other side doesn’t leave the table.”