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Temptation to 'game the system' could derail US-China trade deal, says former American official

Key Points
  • While there's a "strong likelihood" that the U.S. and China will be able to hammer out a deal, there are a few factors that could derail its prospects, said Frank Lavin, who formerly served as U.S. under secretary of commerce for international trade.
  • In particular, there's potential for "gamesmanship" when it comes to trade concessions that will be "painful for China," involving the trickier intellectual property issues that may be difficult to enforce, according to Lavin.
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I wouldn't bet on timing of a US-China trade deal: Export Now

A trade deal between the United States and Chinawhich may be just around the corner — could be derailed by a "temptation to game the system," a former U.S. diplomat and ambassador told CNBC on Friday.

While there's a "strong likelihood" that the two sides will be able to hammer out a deal, there are a few factors that could derail its prospects, said Frank Lavin, who formerly served as U.S. under secretary of commerce for international trade.

"There's always a temptation for someone to game the system. If you and I are in an agreement, and we're there and we're going to sign tomorrow, I always have an incentive to say, 'Why don't I just take my offer down one percent?' And you're already at the table, you're already set for celebration, and let me just see if I can do this," said Lavin, who is now chief executive of business consultancy Export Now.

In particular, there's potential for "gamesmanship" when it comes to trade concessions that will be "painful for China," involving the trickier intellectual property issues, according to Lavin, who was also U.S. ambassador to Singapore.

No deal is comprehensive, always there's some issue or group or segment that isn't addressed. And so they are going to scream bloody murder.
Frank Lavin
Export Now CEO

"But on some of the IP issues — we're going to end compulsory licensing, or end compulsory sharing of IP data — that's a little harder to enforce, because what is compulsory? There might not be anything formally legal that requires it, but there might be incentives, or pressure, or say, you want to build a new plant in China, can we really go along with it?" he said.

"So the scope for gamesmanship, I think, with some of these issues, and that's going to be where the U.S. does have to discipline the system, and ... police what's going on," Lavin added.

And while some parts of the deal may require external enforcement, the elements of an agreement that are less painful for China are likely to see a "self-enforcing, self-discipline" type of system, Lavin said.

"Because look, lower tariffs help China, they help the consumers, they temper inflation. So, that's easy to live with, and it's very visible, very transparent," he said.

China earlier this month announced it would lower tariffs on some imported consumer goods ranging from computers to furniture and bicycles.

President Donald Trump (L) shakes hand with China's President Xi Jinping at the end of a press conference at the Great Hall of the People in Beijing on November 9, 2017.
Fred Dufour | AFP | Getty Images

Yet Lavin warned that there could be some unforeseen hiccups in the negotiations as the deal nears its completion.

"There's going to be some party — we won't know till we see the details — that's not pulled into the lifeboat," Lavin said. "No deal is comprehensive, always there's some issue or group or segment that isn't addressed. And so they are going to scream bloody murder."

Negotiators from both sides met in Beijing on Wednesday for talks, after which Chinese Vice Premier Liu He will be in Washington for talks next week.

Both sides have met several times in a bid to hammer out a deal to end their trade war. The talks have focused on a range of issues, including economic structural reforms and the systemic coercion of Western companies to hand over their advanced technologies in exchange for market access.

Some sticking points are reportedly still up in the air, such as how the agreement would be enforced, and disputes as to whether to remove existing tariffs or keep them in place as a way to maintain some pressure on both parties to stick to the terms of the deal.

Although the trade war has been blamed for periods of volatility over the last year, the markets have largely already come to assume that a deal will be struck, according to Kelvin Lau, senior economist for global research at Standard Chartered.

That is, news of an agreement would be unlikely to send markets higher, he explained. But after any deal is announced, investors will be closely scrutinizing the details, such as the type of penalty imposed on China should it fail to keep to the terms, he added.

Regardless, some type of deal is likely to be reached, Lavin said, because that's in the best interest of U.S. President Donald Trump:  "He's the one who lit the fire ... He's now has a huge incentive to say ... I fixed it. It's now the best trade deal ever."

"He'll want to take a few victory laps on this," Lavin added.