Wires

UPDATE 1-U.S., China 'close to finalizing' parts of Phase 1 trade pact -USTR

David Lawder and Andrea Shalal

(Recasts with USTR statement; adds Trump comment)

WASHINGTON, Oct 25 (Reuters) - U.S. and Chinese trade officials are "close to finalizing" some parts of an agreement after high-level telephone discussions on Friday, the U.S. Trade Representative's office said, adding that deputy-level talks would proceed "continuously."

In a statement issued after the call, the USTR provided no details on the areas of progress.

"They made headway on specific issues and the two sides are close to finalizing some sections of the agreement. Discussions will go on continuously at the deputy level, and the principals will have another call in the near future," it said.

The call came as Washington and Beijing are working to agree on the text for a "Phase 1" trade agreement announced by U.S. President Donald Trump on Oct. 11. Trump has said he hopes to sign the deal with China's President Xi Jinping next month at a summit in Chile.

Beijing was expected to request cancellation of some planned and existing U.S. tariffs on Chinese imports during the phone call, people briefed on the negotiations told Reuters.

In return, China was expected to pledge to step up its purchases of U.S. agricultural products.

The world's two largest economies are trying to calm a nearly 16-month trade war that is roiling financial markets, disrupting supply chains and slowing global economic growth.

"They want to make a deal very badly," Trump told reporters at the White House. "They're going to be buying much more farm products than anybody thought possible."

So far, Trump has agreed only to cancel an Oct. 15 increase in tariffs on $250 billion in Chinese goods as part of understandings reached on agricultural purchases, increased access to China's financial services markets, improved protections for intellectual property rights and a currency pact.

But to seal the deal, Beijing is expected to ask Washington to drop its plan to impose tariffs on $156 billion worth of Chinese goods, including cell phones, laptop computers and toys, on Dec. 15, two U.S.-based sources told Reuters.

Beijing also is likely to seek removal of 15% tariffs imposed on Sept. 1 on about $125 billion of Chinese goods, one of the sources said. Trump imposed the tariffs in August after a failed round of talks, effectively setting up punitive duties on nearly all of the $550 billion in U.S. imports from China.

"The Chinese want to get back to tariffs on just the original $250 billion in goods," the source said.

Derek Scissors, a resident scholar and China expert at the American Enterprise Institute in Washington, said the original goal of the early October talks was to finalize a text on intellectual property, agriculture and market access to pave the way for a postponement of the Dec. 15 tariffs.

"It's odd that (the president) was so upbeat with (Chinese Vice-Premier) Liu He and yet we still don't have the Dec. 15 tariffs taken off the table," Scissors said.

U.S. Treasury Secretary Steven Mnuchin last week said no decisions were made about the Dec. 15 tariffs, but added: "We'll address that as we continue to have conversations."

SMALLER PURCHASES?

If a text can be sealed, Beijing in return would exempt some U.S. agricultural products from tariffs, including soybeans, wheat and corn, a China-based source told Reuters. Buyers would be exempt from extra tariffs for future buying and get returns for tariffs they already paid in previous purchases of the products on the list.

But the ultimate amounts of China's purchases are uncertain.

Trump has touted purchases of $40 billion to $50 billion annually - far above China's 2017 purchases of $19.5 billion as measured by the American Farm Bureau.

One of the sources briefed on the talks said China's offer would start at around $20 billion in annual purchases, largely restoring the pre-trade-war status quo, but this could rise over time. Purchases also would depend on market conditions and pricing.

U.S. Trade Representative Robert Lighthizer has emphasized China's agreement to remove some restrictions on U.S. genetically modified crops and other food safety barriers, which the sources said is significant because it could pave the way for much higher U.S. farm exports to China.

The high-level call came a day after U.S. Vice President Mike Pence railed against China's trade practices and what he termed construction of a "surveillance state" in a major policy speech. But Pence left the door open to a trade deal with China, saying Trump wanted a "constructive" relationship with Beijing.

While the U.S. tariffs on Chinese goods has brought China to the negotiating table to address U.S. grievances over its trade practices and intellectual property practices, they have so far failed to lead to significant change in China's state-led economic model.

The "Phase 1" deal will ease tensions and provide some market stability, but is expected to do little to deal with core U.S. complaints about Chinese theft and forced transfer of American intellectual property and technology. The intellectual property rights chapter in the agreement largely deals with copyright and trademark issues and pledges to curb technology transfers that Beijing has already put into a new investment law, people familiar with the discussions said.

More difficult issues, including data restrictions, China's cybersecurity regulations and industrial subsidies will be left for later phases of talks. But some China trade experts said that a completion of a Phase 1 deal could leave little incentive for China to negotiate further, especially with a U.S. election in 2020.

"U.S.-China talks change very quickly from hot to cold but, the longer it takes to nail down the easy phase 1, the harder it is to imagine a phase 2 breakthrough," said Scissors.

(Additional reporting by Jonathan Landay in Washington and Hallie Gu in Beijing; editing by Heather Timmons, Simon Cameron-Moore and Dan Grebler)