U.S.-China Trade Talks Stumble on Beijing’s Spending at Home

BEIJING — One year ago, when he began a multibillion-dollar trade war with China that shook the global economy, President Trump demanded that Beijing end lavish government spending aimed at making the country a world power in computer chips, robotics, commercial aircraft and other industries of the future.

Today, as the two sides struggle to reach a truce, the Trump administration is finding just how difficult that will be.

Trade talks between the United States and China nearly ground to a halt this past week, and a seemingly intractable dispute over subsidies is a big part of it. Robert E. Lighthizer, the United States trade representative, accused China last Monday of reneging on what he described as “good, firm commitments on eliminating market-distorting subsidies.” Vice Premier Liu He, the leader of China’s negotiating team, said that it was normal for negotiations to have ups and downs, but has also nodded to the subsidies issue in vowing repeatedly over the last several days not to bend on China’s principles.

President Trump on Friday raised tariffs on $200 billion a year worth of Chinese goods, hitting goods leaving China’s shores as of that day. He has directed Mr. Lighthizer to start on Monday the long process for raising tariffs on all Chinese goods.

In talks and in an exchange of documents, Chinese negotiators surprised their American counterparts by calling at the start of this month for numerous changes, people familiar with the negotiations said. While the requests covered everything from intellectual property to currency manipulation, the hardened Chinese stance against limiting government subsidies poses a particular challenge.

The United States wants China to enshrine limits on subsidies in its national laws. China says it will not let a foreign country tell it how to change its laws. A schedule of planned legislation released by Chinese officials on Saturday did not include any of the subsidy-related measures that Washington has sought.

Beijing has long helped its homegrown industries in strategically important areas like jetliners and parts for nuclear reactors. It also supports efforts to build up China’s high-tech industries like microchips and self-driving cars to make sure the economy will stay competitive.

Stopping, or even tracking, China’s subsidies is a difficult task. Many subsidies take the form of cheap loans from government-controlled banks or through other opaque arrangements. Foreign companies also complain that they are often shut out of local government contracts through written and unwritten rules, giving Chinese competitors a strong base at home while they pursue global expansion plans.

China has agreed to disclose more information about its subsidies and stop those that violate rules under the World Trade Organization, the global trade referee. But the two sides are also at loggerheads over how to interpret those W.T.O. rules, said people familiar with the talks, who asked for anonymity because they were not authorized to speak publicly.

In his news briefing last Monday, Mr. Lighthizer said China’s trade negotiators had made significant, enforceable commitments to the United States, but added that “some people” in China had objected to them, without saying who. China’s trade negotiators are heavily drawn from the ranks of the country’s market-oriented economic reformers and have long been at odds with officials who want greater reliance on heavily subsidized state-owned enterprises.

The Trump administration insists on leaving in place tariffs on imports from heavily subsidized Chinese industries, at least for this year. That would protect the American market in industries that trade hawks within the administration see as strategically crucial.

Chinese officials oppose those tariffs. Mr. Liu told Chinese state-controlled media on Saturday that the Chinese government “believes that tariffs are the starting point for trade disputes between the two sides — if an agreement is to be reached, the tariffs must all be canceled.”

Chad Bown, a senior fellow at the Peterson Institute for International Economics, said that tariffs imposed bilaterally were a poor tool to address a global problem like overcapacity. Even if the United States successfully kept part of the tariffs in place, they would protect only American business at home. Subsidized Chinese business could still compete at home, in Europe and almost everywhere else around the globe, hurting prospects for American exporters.

In the United States, Democrats have been increasingly critical of the Trump administration for not obtaining more trade policy concessions. Yet even some Democrats said they saw limited prospects that China will agree to reduce subsidies.

“To expect the end of essentially a planned or a centralized economy would be awfully ambitious,” Senator Chris Coons, Democrat of Delaware, said in a recent interview in Beijing.

“To be fair the Obama administration got nowhere, the Bush administration got nowhere,” Derek Scissors, a resident scholar at the American Enterprise Institute, said about convincing China to roll back its subsidies. “This is a crucial way the Chinese run their economy.”

If a trade deal does not fully cover subsidies, the United States could resort to unconventional responses. For example, the United States has pushed for an extensive revision of its laws surrounding foreign investments and exports of high-tech products, primarily aimed at China, to try to preserve its commercial and military edge.

The Trump administration has made some progress in the emerging trade deal on other ways the Chinese government props up its industries. Beijing has promised to tell its state-controlled banks to show less favoritism in lending to state-owned enterprises instead of private sector businesses. Beijing has also pledged to open up the bidding for government contracts to foreign companies, instead of reserving them almost completely for Chinese companies.

If China opens up the bidding, “that would actually, genuinely move the market needle on opportunities for foreign companies in China,” said Scott Kennedy, a China economic policy specialist at the Center for Strategic and International Studies.

On the issue of subsidies, China has grown more quiet. Its “Made in China 2025” plan two years ago called for $300 billion in special financing and other assistance for 10 advanced manufacturing industries. China shelved the catchy name for the program in recent months, while expressing determination to continue investing in “high-quality manufacturing.”

China is willing to publicly list and disclose subsidies from its central government, people familiar with the trade talks said. But instead of disclosing these subsidies to the United States, which might be seen by the Chinese public as humiliating, the Chinese government wants to disclose them through the W.T.O., which would then pass on the list to its members.

W.T.O. rules ban governments from helping exporting companies with cash, free land and other easily measured gifts. The rules are somewhat looser on measures like cheap loans from state-controlled banks or efforts to replace imports by fostering domestic production of the same goods.

Beijing has told American negotiators that it will end subsidies if they are breaking W.T.O. rules. But the Chinese national government’s assistance to industries tends to fall into the categories that are hardest to prove as violating W.T.O. rules.

In China, the subsidies more likely to break W.T.O. rules tend to be given to exporters by provincial and local government agencies in China. In the trade talks with the United States, Beijing has agreed to look for provincial and local subsidies that may violate W.T.O. rules, but has been resistant to passing legislation that would abolish them, people familiar with the talks said.

At least a few market-oriented Chinese government officials have worried that broad subsidies might be squandered by companies more interested in taking the government’s money than in creating competitive products. But these critics appear to be a shrinking minority.

Lou Jiwei, a prominent advocate of economic reform and the chairman of China’s social security fund, told The South China Morning Post in early March that the Made in China 2025 plan “wasted taxpayers’ money.”

Mentions of Mr. Lou immediately disappeared from state-controlled media. There followed a cursory statement by the official Xinhua news agency on April 4 that he had been removed from his post at the social security fund. No reason was given.

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