Slowly but surely, a more complete picture is emerging of what went wrong between the US and China as trade talks entered what most observers believed was the home stretch.
Earlier this week, reports indicated that US negotiators were blindsided by Beijing’s refusal to change Chinese law in pursuit of a deal. That, apparently, cast doubt on whether some key sticking points, including forced tech transfer, were in fact resolved.
Fast forward to Wednesday, and Reuters is out with the most detailed account yet of what went awry in the days leading up to Donald Trump’s infamous Sunday evening tweets.
According to a trio of US government sources and three private sector sources, Beijing sent Washington a diplomatic cable on Friday night which contained what Reuters describes as “systematic edits to a nearly 150-page draft trade agreement that would blow up months of negotiations between the world’s two largest economies.” Here’s more:
In each of the seven chapters of the draft trade deal, China had deleted its commitments to change laws to resolve core complaints that caused the United States to launch a trade war: theft of U.S. intellectual property and trade secrets; forced technology transfers; competition policy; access to financial services; and currency manipulation.
The stripping of binding legal language from the draft struck directly at the highest priority of U.S. Trade Representative Robert Lighthizer – who views changes to Chinese laws as essential to verifying compliance after years of what U.S. officials have called empty reform promises.
Chinese Vice Premier Liu He, Xi’s point man on the deal, has implored Bob Lighthizer and Steve Mnuchin to “trust” China, where that means allowing Beijing to implement its promises via administrative and regulatory actions. That, Lighthizer contended, isn’t acceptable.
US equity futures began to fall shortly after the Reuters story crossed and appear to be fading further as traders digest the implications.
The VIX rose back above 20.
Reuters goes on to cite two sources as saying that the latest round of talks went very poorly and appeared to presage significant backtracking by Beijing. One source said the “talks were so bad that the real surprise is that it took Trump until Sunday to blow up.”
But “blow up” he did, and so did global markets, although “blow up” might be a bit hyperbolic.
Tuesday’s action in US equities seemed to suggest that Monday’s rebound off overnight lows hit following Trump’s tweets was predicated almost entirely on the assumption that the US president was just letting off steam over the weekend. When Lighthizer confirmed the tariff rate on $200 billion in Chinese goods will indeed more than double on Friday at 12:01 AM, the mood soured.
Wednesday’s Reuters story suggests a deal by Friday is a virtual impossibility. Liu would need to remove all of the edits Beijing made to the 150-page draft deal and agree to alter Chinese law, all within the next 48 hours. Reuters also says “China would have to move further towards the US position on other sticking points, such as demands for curbs on Chinese industrial subsidies.”
In other words, you can probably forget it.
As Trump would say: “Tariffs are coming.”