Xi Jinping, China’s president, left, and U.S. President Donald Trump look on during a welcome ceremony outside the Great Hall of the People in Beijing, China,. (Photographer: Qilai Shen/Bloomberg)

Burned Once by Trump, China's Xi Wary About Fresh Trade Talks

(Bloomberg) -- The last time the U.S. and China engaged in serious trade negotiations, President Xi Jinping’s top economic aide got burned.

Following intense talks in Washington this May, Vice Premier Liu He declared that a trade war had been avoided after China agreed to “significantly increase purchases” of U.S. goods. In interviews with Chinese media, Liu said Donald Trump showed him respect as Xi’s special representative, and he had “a very strong feeling” the U.S. president wanted good relations with Beijing.

Burned Once by Trump, China's Xi Wary About Fresh Trade Talks

But just days later, Trump said the U.S. would slap tariffs on as much as $50 billion of Chinese imports, a precursor to further escalations. The move torpedoed any progress, and was an embarrassment for Liu.

Now, as both sides hint at the possibility of restarting talks, China is worried that it might get played again, according to three Chinese officials who asked not to be identified discussing strategy. Xi’s administration still wants to cut a deal with the U.S. and is open to talks, but it will be hard for Chinese negotiators to trust their American counterparts, the people said.

China’s hesitation shows the difficulty in deescalating trade tensions between the world’s two largest economies, a spat that has increased risks to global growth. It also reflects the high stakes for Xi, who has faced rare rumblings of discontent for his administration’s handling of the trade spat after he was elevated to become China’s most powerful leader in decades.

“If another deal is rejected it would also reflect badly on Xi,” said Ether Yin, a partner at advisory firm Trivium China in Beijing. “Negotiations are about who has the upper hand. If you’ve been rejected once and then you approach the other party again, it makes you look weak.”

In consolidating his rule over the past year, Xi laid out a decades-long vision to bolster the Communist Party’s strength at home and turn China into a leading global power abroad. Now Chinese academics, economists and some officials have begun to question whether the leadership could’ve done more to avoid a confrontation that may hurt the economy.

Trump has threatened to put tariffs on all Chinese imports to the U.S., and accused China of weakening its currency to gain an advantage on trade. On top of that, China’s stock market is the world’s worst performer this year among major indexes and an infant vaccine scandal has shocked the nation, making the challenges facing Xi’s government all the more daunting.

Xi Backlash

“Some people are blaming the backlash against China in all the advanced industrial countries on Xi’s over-reaching both in foreign policy and domestic politics,” said Susan Shirk, a former deputy assistant Secretary of State for East Asia who was in Beijing recently for meetings. “They are calling for greater moderation and restraint.”

As the impasse drags on, China has experimented with new messages and tactics in a bid to ease tensions, including reaching out to U.S. allies and toning down its rhetoric. In doing so, it has stuck to the red lines it stated previously, including that subsidies for key sectors like artificial intelligence and robotics -- a key part of its Made in China 2025 policy -- aren’t up for negotiation.

In early rounds of talks with the Trump administration, China focused on reducing the U.S.’s trade deficit, a favorite topic of the American president. Officials in Beijing now recognize that this approach was too narrow, according to two of the people.

One area where they see a possible compromise is regarding intellectual property rights, according to one official. The U.S. has justified tariffs in part based on a Section 301 investigation released earlier this year that accused China of stealing American intellectual property in an effort to dominate the development of advanced technology.

“The narrative is that China has been stealing tech from the West and poses a strategic threat,” said Yin from Trivium. “That’s a charge that China must counterbalance otherwise China will be viewed as a disruptor of international commerce.”

Chinese Premier Li Keqiang made a point of addressing concerns about intellectual property in China during a session with European business leaders on July 16.

“I want to hear if any big company here would like to make a complaint here on the theft of intellectual property, so that I will take great measures,” he told a BMW executive. Even after the executive told Li that his biggest concern wasn’t intellectual property, the premier persisted in saying how seriously the government takes the issue.

Trump Effect

Not only does a focus on intellectual property appeal to the moderates in Trump’s cabinet who want a deal, but it could also help China court allies in the fight like Europe and Japan.

European officials in Beijing for the EU-China Summit last week said China adopted an unusually conciliatory tone in discussions, something they attributed partly to what they called the Trump effect. The two sides exchanged offers on a bilateral investment treaty, agreed to their first joint statement in three years, and signed an action plan on protecting intellectual property.

Beijing has also recently taken a more low-key approach to propaganda as it seeks to avoid antagonizing the U.S. and potential allies against Trump. State media have been told to downplay the Made in China 2025 initiative, as well as to avoid talking about China’s greatness, and focus instead on how China has helped other countries, according to a person familiar with the instructions.

‘Tariffs are the Greatest!’

Asked this week if Made in China 2025 was still underway, a spokesman for China’s Ministry of Industry and Information Technology avoided any sweeping rhetoric while insisting that the initiative was proceeding "step by step and at our own pace."

Still, while China has adjusted its tactics, the anger at the U.S. for making one of Xi’s senior aides look bad remains one of the biggest obstacles to an agreement. Gao Feng, a spokesman at the Ministry of Commerce, said last week that the U.S. is responsible for the standoff.

Trump has given no sign of backing down, saying Tuesday ahead of a meeting with EU Commission President Jean-Claude Juncker that “Tariffs are the greatest! Either a country which has treated the United States unfairly on Trade negotiates a fair deal, or it gets hit with Tariffs.”

“Some U.S. officials said China is to blame for the collapse of trade talks, which totally goes against the truth,” Gao told reporters. “Looking back at the entire process, it is the U.S. who behaved capriciously and hasn’t honored its words, closing the door for bilateral negotiations.”

To contact Bloomberg News staff for this story: Peter Martin in Beijing at pmartin138@bloomberg.net

©2018 Bloomberg L.P.

With assistance from Editorial Board