China’s Top Negotiator ‘Cautiously Optimistic’ About Reaching Trade Deal

(Bloomberg) --

China’s chief trade negotiator indicated he was “cautiously optimistic” about reaching a phase one deal with the U.S., as two titans of American diplomacy in Asia warned of the dangers of escalating the tariff war.

Vice Premier Liu He made the comments in a speech in Beijing on Wednesday ahead of the Bloomberg New Economy Forum, according to people who attended the dinner and asked not to be identified. He has also invited his U.S. counterpart, Robert Lighthizer, to travel to China for talks this month, but the invitation hasn’t yet been accepted, people familiar with the matter said.

Speaking at the Forum on Thursday, former U.S. Secretary of State Henry Kissinger said America and China were in the “foothills of a Cold War,” and warned that the conflict could be worse than World War I if left to run unconstrained. Later in the day, former Treasury Secretary Henry Paulson warned of the perils of decoupling the world’s two largest economies.

Since President Donald Trump announced the phase one deal a month ago, markets have been whipsawed by comments from both sides, first indicating progress, and then the opposite.

The latest potential hurdle came after Liu made his dinner-time comments, when the U.S. House voted 417-1 for legislation supporting Hong Kong protesters that has already been unanimously approved by the Senate. It could go to Trump as soon as Thursday and he plans to sign the bill, a person familiar with the matter said.

Beijing’s Pledges

Liu also explained China’s plans for reforming state enterprises, opening up the financial sector, and enforcing intellectual property rights -- issues at the core of U.S. demands for change in China’s economic system. Separately from the speech, he told one of the attendees that he was “confused” about the U.S. demands, but was confident the first phase of an agreement could be completed nevertheless.

Liu’s remarks cushioned declines in stocks in Asia, Europe and the U.S. as investors weighed the impact of the House bill on relations between the world’s two largest economies.

U.S. and Chinese trade negotiators will continue communicating closely and work toward a phase one deal, Ministry of Commerce spokesman Gao Feng said at a briefing in Beijing on Thursday. Responding to questions including whether the two sides agreed on agricultural purchases and tariff removal, as well as a media report on the timetable for a deal, Gao said related rumors were not accurate. It was unclear exactly what he was referring to.

If efforts to reach a phase one deal fail before Dec. 15, Trump has threatened to impose 15% tariffs on some $160 billion in imports from China.

While the Hong Kong bill is a negative factor for the phase one deal, China still may be able to reach an agreement with the U.S. this year, said Zhang Yansheng, who previously worked at the National Development and Reform Commission, the country’s top economic planner.

“The optimistic view is that the phase-one deal can be reached within this year, and a more pessimistic one is that the first phase will be dragged to some point next year,” said Zhang, who is now chief researcher at the China Center for International Economic Exchanges.

Kissinger, 96, said he hoped trade negotiations would provide an opening to political discussions between the two countries.

“Everybody knows that trade negotiations, which I hope will succeed and whose success I support, can only be a small beginning to a political discussion that I hope will take place,” he said.

Kissinger spoke hours after Chinese Vice President Wang Qishan addressed the NEF, saying his country was committed to peace and would follow through on policy changes despite facing challenges at home and abroad.

“Between war and peace, the Chinese people firmly choose peace,” he said. “We should abandon the zero-sum thinking and Cold War mentality.”

The Forum is being organized by Bloomberg Media Group, a division of Bloomberg LP, the parent company of Bloomberg News.

Meantime, Paulson called on China to open more and said the U.S. should resist the temptation to delist Chinese firms from U.S. exchanges, calling it a “terrible idea.” Both countries should determine the rules of the road for high-end technology such as 5G, he said.

“There will be some natural decoupling,” Paulson said. “But the delusions of a wholesale, comprehensive decoupling and an economic iron curtain will leave our countries, and the world, worse off. We need to avoid that outcome.”

After almost two years of negotiations and escalations -- and plenty of false dawns -- trade negotiators from the U.S. and China are making progress in key areas. Some people close to the talks have described them as being in a sensitive, make-or-break stage.

The looming December tariffs, meanwhile, have become the latest hard deadline -- replacing a canceled Nov. 16-17 summit in Chile at which Trump and China’s President Xi Jinping were expected to sign a deal.

The negotiating teams are using their failed May proposal as a benchmark for how much a phase-one deal covers of the once-near agreement and how much tariffs will be removed as part of the initial deal.

There’s been signs of a thawing on other fronts. The U.S. Commerce Department has started approving some suppliers’ applications for licenses to do business with China’s Huawei Technologies Co., partially reopening access to one of the biggest buyers of U.S. technology.

While the phase one deal remains uncertain, trade experts say frictions between the world’s two biggest economies will continue regardless of that outcome.

“Tactical shifts may deescalate tensions in the short term but will not resolve fundamental differences which can no longer be papered over,” said Charlene Barshefsky, who negotiated China’s entry into the World Trade Organization under President Bill Clinton. “We are at an inflection point. No outcome is inevitable but two decades of careful management of the relations between China and the West have run its course.”

--With assistance from Miao Han.

To contact the reporter on this story: Shawn Donnan in Beijing at sdonnan@bloomberg.net

To contact the editor responsible for this story: Malcolm Scott at mscott23@bloomberg.net

©2019 Bloomberg L.P.