The enforcement conundrum in US-China trade talks

The enforcement conundrum in US-China trade talks

04/04/2019 - 18:28 - What’s at stake for both sides as negotiators push to seal a deal

As the US and China get closer to a trade deal, a key sticking point remains: how to enforce an agreement between the two largest and most powerful economies in the world.

This thorny question has become the main remaining hurdle in the talks to resolve their trade dispute, which are unfolding in Washington this week, in a potentially make-or-break session involving Liu He, China’s vice-premier, and Robert Lighthizer, the US trade representative.

Why is this such a big deal?

From the beginning of talks in December, Mr Lighthizer and other US officials have stressed that enforcement is pivotal to the success of the negotiation. They want to avoid falling into a trap where China commits to a series of measures — from purchases of US goods, to structural reforms making its economy more open, to a clampdown on the theft of intellectual property — that are never properly implemented. US officials often cite recent history in which China made bold promises of economic policy changes to previous American presidents — and never followed through.

What is the US looking for?

Mr Lighthizer has already laid out Washington’s ideal scheme to monitor and implement the deal. If there is concern that China may be violating the agreement, US and Chinese officials would discuss the matter in a series of meetings, including a semi-annual consultation between Mr Lighthizer and Mr Liu.

If there is still no satisfactory conclusion, the US wants the right to “unilaterally” but “proportionally” impose punitive tariffs on China. And Washington also wants Beijing to forgo any retaliation to those measures, either through levies or by challenging the US action at the World Trade Organization.

How does China feel about this?

China is not happy. The Chinese are willing to accept multiple rounds of dialogue to settle any problems — and may even be willing to stomach a US right to reimpose some tariffs if it feels irked by Beijing’s non-compliance. But waving the white flag on retaliation is a bridge too far for many Chinese officials who feel it is truly unequal and a threat to the country’s sovereignty. This is at the heart of the stand-off and, as of this week, still unresolved.

Who will blink first?

It is hard to tell. Donald Trump and Xi Jinping both seem inclined to reach a deal, so they will have to overcome this hurdle. But if either is looking for a reason to ditch the negotiations and deepen the trade war, enforcement is the perfect place to make a stand because it does not involve the interests of one particular sector over another. It is a matter of national pride — to which hawks in both capitals are very sensitive.

What are the other issues involved?

Another element of the tug of war over enforcement relates to the fate of existing tariffs on Chinese goods. Beijing wants them erased when a deal is struck, but Washington wants at least some of the levies on $250bn of Chinese imports to be preserved — another way to ensure that China does not stray from its promises. A favourable outcome for the US on the existing tariffs could mitigate any Chinese insistence on the freedom to retaliate against future US tariffs, but it is unclear that kind of compromise would be acceptable.

What will happen to the existing tariffs?

One possible solution that is being discussed by officials would involve a gradual reduction of tariffs after the pact is sealed, based on certain benchmarks for compliance and a set timeline that would reassure Beijing that they would not remain forever. But the weakness of such a tiered approach is that the triggers for lower tariffs could be subject to interpretation, fuelling new tensions between the capitals.

How does business feel?

US companies have been incredibly frustrated by the slow — even halting — pace of reforms in China, and want to see Beijing held accountable. They are also warning that an overly aggressive monitoring system could prolong the uncertainty over the US-China economic relationship, especially if the threat of new punitive tariffs from the US is constantly looming. While most would welcome an agreement within the next few weeks, none should be under the illusion that calm will immediately ensue in the US-China trade relationship.

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