- The United States is attempting to diffuse its conflict with China into a broader range of issues not related to trade by bringing up human rights issues in Xinjiang, says Vishnu Varathan at Mizuho Bank.
- Washington restricted 28 Chinese companies and public security bureaus from doing business with American firms and imposed visa restrictions on certain officials due to human rights issues in Xinjiang.
- Observers have challenged the U.S. position on issues like trade deficits, currency manipulation of the Renminbi, security problems related to Huawei. With human rights abuses in Xinjiang, the issue becomes more sensitive, according to Varathan.
High-level trade talks between the U.S. and China are due to begin Thursday in Washington, as both countries seek to break a deadlock in trade negotiations.
The U.S.-China conflict intensified this week after Washington restricted 28 Chinese companies and public security bureaus from doing business with American firms. The U.S. also imposed visa restrictions on some Chinese officials due to human rights issues in Xinjiang.
"Once you go down the path of human rights, then the need to justify this on economic grounds diminishes vastly," Vishnu Varathan, head of economics and strategy at Mizuho Bank, told CNBC.
Situated in northwest China, Xinjiang has made headlines for its detention and "re-education" camps that hold an estimated 1.5 million Muslims. Many of those camps violate what Amnesty International describes as a "highly restrictive and discriminatory" law that China says is designed to combat extremism.
The face-off has so far focused on a myriad of issues including China's large trade deficit with the U.S., currency manipulation, limited market access, intellectual property theft and security problems related to Huawei.
In many of those instances, observers have challenged the U.S. position — for example, when Washington called China a currency manipulator, some observers disputed it and said it was not the case, Varathan explained.
With human rights, however, the issue has become more sensitive.
"You can't fault them for it. You can't say, 'technically that's wrong,' and it becomes a sensitive issue," Varathan said. "In bringing this up, I think there are few who can factually refute and cut the U.S. down on their position."
Predictably, this week's moves from Washington drew criticism from China. Its commerce ministry urged the U.S. to "immediately stop making irresponsible remarks on the issue of Xinjiang" and to "stop interfering" in China's internal affairs.
Ahead of this week's talks, a number of conflicting reports appeared to suggest little progress had been made.
Experts told CNBC the two-day meeting, starting Thursday, is not expected to yield any kind of major deal and the prospects of a narrow agreement — or at least a framework — are becoming less likely. U.S. tariffs on $250 billion worth of Chinese goods are due to rise to 30% on Oct. 15.
"It is literally impossible to have any optimism that this round of trade talks will lead to a breakthrough in the context of demands that China undergo structural reform to address what the US finds as unfair trade practices," Steven Okun, senior advisor at McLarty Associates told CNBC.
"Presuming the US would not accept a mini-deal based primarily on a substantial purchase of US goods, the most one can reasonably expect in terms of progress is a delay to the tariffs due to be implemented on October 15th," Okun said by email. He added that if the U.S. includes "non-traditional trade demands within the context of a trade agreement, then there is no end to this portion of the trade war in sight."
The Xinjiang-related restrictions was "the nail in the coffin" for any breakthrough during this round of trade talks, according to Gabriel Wildau, senior vice president at Teneo Risk Advisory.
Still, Wildau told CNBC's "Squawk Box" on Thursday in Asia that he is more optimistic that even with the U.S. bringing up human rights issues, China may be receptive to doing a deal if the circumstances are right.
"The Chinese are very used to, at this point 30 years after Tiananmen Square, very used to receiving, to absorbing, U.S. criticism on human rights," he said. "They've shown a willingness over the years to compartmentalize that anger against that criticism, and to prioritize important economic issues and important economic relationships with the U.S. and other big economies."
The Trump administration wants China to implement structural changes to how it does business. That includes intellectual property protections, forced technology transfers, addressing the lack of market access for foreign companies as well as state subsidies to prop up local players.
Beijing is unlikely to yield to many of those U.S. demands because it would be seen as an infringement on its sovereignty, Okun said.
An agreement can only be reached if Trump "changes his demands and offers to reduce tariffs in exchange for less than all encompassing changes to the underlying causes of the unfair trade practices now demanded, coupled with a large purchase of US goods."
"Given the state of the economy and the lead-in to the 2020 campaign, it is a possibility he will do so," he added.
Chinese President Xi Jinping will not agree to any deal that puts him in a situation "where (Donald) Trump seems to be jerking him around and demanding more after a deal appeared to be settled," Wildau said. He explained that with the impeachment inquiry underway in Washington, U.S. politics could be the "main deciding factor in whether we're ultimately going to get a deal."
"These Xinjiang sanctions will not be the factor that scuttles that deal" if the political environment in the longer term is favorable for an agreement, Wildau explained.
"These companies that were sanctioned this week, they're important. But, they're not nearly as important as a company like Huawei," he said. "That issue has got to be resolved for there to be any kind of trade agreement."
In May, Huawei was put on the same trade blacklist as the 28 Chinese companies and security bureaus, but Washington later softened its stance somewhat on the tech giant.