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China prepares a hard-line stance on Trump’s trade demands

U.S. President Donald Trump and China's President Xi Jinping leave a business leaders event at the Great Hall of the People in Beijing on November 9, 2017.
Nicolas Asfouri | AFP | Getty Images
U.S. President Donald Trump and China's President Xi Jinping leave a business leaders event at the Great Hall of the People in Beijing on November 9, 2017.

China will refuse to discuss President Trump's two toughest trade demands when American negotiators arrive in Beijing this week, people involved in Chinese policymaking say, potentially forcing Washington to escalate the dispute or back down.

The Chinese government is publicly calling for flexibility on both sides. But senior Beijing officials do not plan to discuss the Trump administration's two biggest demands: a mandatory $100 billion cut in America's $375 billion annual trade deficit with China and curbs on Beijing's $300 billion plan to bankroll the country's industrial upgrade into advanced technologies such as artificial intelligence, semiconductors, electric cars and commercial aircraft.

The reason: Beijing feels its economy has become big enough and resilient enough to stand up to the United States.

A half-dozen senior Chinese officials and two dozen influential advisers laid out the Chinese government's position in detail during a three-day seminar that ended here late Monday morning. A handful of foreign writers were invited from around the world to make sure China's stance would be known overseas. All of the officials and most of the advisers at the seminar insisted on anonymity because of diplomatic sensitivities.

It is not clear what will happen when the two sides sit down this week or whether either will find a reason to waver. Still, the Chinese and American positions are so far apart that China's leaders are skeptical a deal will be possible at the end of this week. They are already raising the possibility that Chinese officials may fly to Washington a month from now for further talks.

"I don't expect a comprehensive deal whatsoever," said Ruan Zongze, the executive vice president of the China Institute of International Studies, which is the policy research arm of China's Foreign Ministry. "I think there is a lot of game playing here."

The Chinese government is frustrated with Mr. Trump's threats to impose tariffs on $150 billion in Chinese goods and dismayed by suggestions in the West that China has a weak bargaining position. Chinese officials believe the country's one-party political system and President Xi Jinping's enduring grip on power — particularly after the repeal of presidential term limits in March — mean that China can outlast the United States and Mr. Trump in any trade quarrel.

The Chinese government believes Mr. Trump's background as a businessman means that at some point he will agree to a deal. Seminar participants also reaffirmed previous Chinese trade policy offers to further open the country's financial and automotive sectors. They also suggested that China would be willing to tighten its intellectual property rules so as to foster innovation within China as well as protect foreign technologies from counterfeiting and other illegal copying.

But China is insisting that the parameters of any deal be limited, and that the tariff threat be removed before a final deal can be struck.

Chinese officials have reached out to Treasury Secretary Steven Mnuchin, who has reacted positively to China's overtures in the auto and financial sectors. Mr. Mnuchin, a former Goldman Sachs executive who will be on the Trump administration's team in Beijing later this week, has sought to calm investors in global financial markets, some of whom have been alarmed by the consequences of a trade war for stock prices and economies.

But the Chinese stance is that two long-term demands raised by trade policy specialists in the Trump administration are unacceptable and should be excluded from the talks later this week.

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One of these demands is a request by White House officials for a $100 billion reduction in the annual trade deficit with China. The other demand, for limits on China's industrial policy, is from the United States trade representative, Robert Lighthizer, who is also part of the American negotiating team scheduled to come to Beijing later this week.

China's position is that the bilateral trade imbalance arises from differences in savings rates. Households in China save roughly two-fifths of their incomes. Americans, on average, save almost nothing. So money from China tends to flow to the United States, buying factories, technology companies, real estate and more, and Americans in turn spend much of that money to buy goods from China. Many economists in the United States, including some at the Treasury, share that view.

By contrast, many trade lawyers, lawmakers on both sides of the aisle and Mr. Trump contend that the trade deficit stems to a large extent from unfair trade practices, including cheap loans by state-controlled banks to exporters.

China is ready to discuss shrinking the $375 billion annual trade deficit. But it wants to do so by buying more high-tech American goods, which Washington has long blocked because of concerns that they may have military value, and by buying more fossil fuels and other goods from the United States.

China is not ready to discuss a mandatory $100 billion reduction in the annual deficit, as the administration has suggested.

A senior Chinese government official said that Beijing is unwilling to negotiate with the United States on any curbs on China's industrial policy, which includes large-scale government assistance to favored industries in advanced-technology manufacturing. China perceives the American demands for curbs on industrial policy as an attempt to stop China's economic development and technological progress, the senior Chinese official said.

Germany and other countries also have industrial policies, and the United States has not objected to them, he added. American and European officials have argued that those policies elsewhere are much narrower and less ambitious.

Other participants in the seminar said that the United States had misunderstood China's industrial policy, known as Made in China 2025. They expressed hope that it might be possible to resolve bilateral differences by explaining the program better and making very small tweaks to it — a stance that still may not appease the Trump administration.

The Chinese government is not simply throwing money, land and other resources to favored industries like robotics, artificial intelligence, semiconductors and aircraft manufacturing, they said. China is engaged instead, they contended, in a carefully thought-out program that measures potential profits for each dollar of investment. So China's program bears some resemblance, they said, to private sector investment programs in the West.

One subject was repeatedly and conspicuously avoided by all officials throughout the seminar, even when advisers occasionally speculated about it: whether China might someday try to link trade disputes to national security issues.

China has been deeply involved in international pressure on North Korea to give up its nuclear weapons and ballistic missiles, an issue of high importance to the Trump administration. Beijing also wants to some day assert control of Taiwan, a self-governing democracy that Beijing regards as a renegade territory.

Tsinghua University's new Academic Center for Chinese Economic Practice and Thinking organized the seminar, which was held at Tsinghua and two other venues in western Beijing. President Xi graduated from Tsinghua, which is in Beijing and is China's top university, and he has filled much of the senior ranks of his government with Tsinghua professors and graduates.

In some respects, the hard stance struck by Chinese officials reflects a hardening of public attitudes in China.

In mid-April, the United States banned American companies from selling their wares to a Chinese telecom equipment maker, ZTE. The move is seen as potentially crippling to the Chinese company, which needs American chips and software to power the smartphones and equipment it sells around the world.

Washington officials cited ZTE's repeated violations of sanctions against Iran and North Korea, but many in China saw it as a reminder by the United States that sizable sectors of the Chinese economy still rely on American-made goods. Much of the Made in China 2025 policy is aimed at reducing that dependence.

The ZTE case "has changed a lot of Chinese people's opinion," said Mr. Ruan, of the China Institute of International Studies. "In the past, people saw us as interdependent."