How the United States and China agreed on a trade that they did not want

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Looking for a direct route to the President, the Chinese ambassador

Cui Tiankai

spoke to the president

Trump's

Son-in-law and advisor,

Jared Kushner,

say people who are familiar with the episode. The US offer hasn't cut enough tariffs, he said to Kushner.

It was time to settle down, answered Mr. Kushner. If not, the president was ready on December 15 to impose new tariffs on Chinese imports of around $ 156 billion, including smartphones and toys. "Don't think about tariff cuts," he advised. "Think about what will happen if you don't make a deal."

For Chinese negotiators dealing with a president they thought was unpredictable, Mr. Kushner's words at least provided certainty, say those familiar with the episode. They also recognized an opportunity: the agreement would not force them to make economic changes that Washington had long insisted on.

About two weeks later, both sides announced the compromise to be signed at a ceremony in the White House on Wednesday. "This is an attempt to work together and solve problems," says

Clete Willems,

a former Trump White House negotiator who had worked on China issues. "It is not everything the United States is going to do."

A Beijing regulator, who is familiar with the negotiations, adds: "Hopefully this agreement can help to ensure that bilateral relations do not deteriorate significantly."

Step by step

China's tariff rate

on US exports

US tariff rate for Chinese exports

China's tariff rate

on US exports

US tariff rate for Chinese exports

China's tariff rate

on US exports

US tariff rate for Chinese exports

China's tariff rate

on US exports

US tariff rate for Chinese exports

The deal promises increased purchases of US goods and services, better access for American companies to China's banking, insurance and other financial sectors, an end to tariff threats, and an opportunity to restore relationships between the world's largest economies. Both sides have also agreed to bi-annual meetings to discuss trade and economic issues.

Still, the deal is not what both sides said. The United States does not receive the fundamental reforms in Chinese economic policy that it sought to support American companies. China's export tax continues to be approximately $ 370 billion.

Two days before Christmas, Chinese leader

Xi Jinping

along with Japanese Prime Minister Shinzo Abe in the Great Hall of the People, where Mr. Abe said he hoped the so-called Phase 1 deal would encourage China to further liberalize its economy, the people familiar with the exchange said.

China has already opened up significantly, Mr. Xi replied, and released a World Bank survey showing China's improved business environment. "It is good to have an agreement for the first phase," he said, but added that many problems remained unsolved and that an agreement "cannot solve everything".

Trade representative Robert Lighthizer and other senior officials of the Trump administration in the White House with Vice Premier Liu He and other Chinese representatives before the US-China trade talks started in February.

Photo:

Joshua Roberts / Reuters

Trump on a war path

This report, on how the limited deal came about, is based on interviews with policymakers in both capitals and with people who have been consulted on the negotiations, and reveals the under-seen pragmatic side of a publicly tense relationship.

When Washington and Beijing got hot last summer, Mr. Trump lost patience. He was outraged that Beijing had failed to meet promised soybean and other commodity purchases, and in August threatened to raise tariffs to half the Chinese retail price in the United States and impose new tariffs on the other half. China, which refused to do so, made a promise to buy, which was returned by suspending the purchase of U.S. agricultural products.

The president contacted Twitter on August 23 and ordered US companies to "immediately look for an alternative to China, including … bringing their businesses home."

Both sides wanted to withdraw from the abyss by September. In Washington, a number of CEOs paid Mr. Trump and his economic advisors to warn of the dangers of the collective bargaining.

Following the president's tweet, Sheldon Adelson, the CEO of Las Vegas Sands Corp., who contributed $ 20 million to Mr. Trump's presidential campaign and whose casinos in Macau depend on China's goodwill, warned the president that new tariffs would The economy and Mr. Trump's re-election opportunities would hamper rising consumer prices.

Mr. Trump with Sheldon Adelson in December.

Photo:

almond ngan / Agence France-Presse / Getty Images

Mr. Trump had long claimed that China was paying the cost of the tariffs. Executives

Best Buy Co.

These included those who pointed out that the burden on companies and customers in the USA is decreasing. A spokesman for Mr. Adelson confirmed his lobbying. Best Buy declined to comment.

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Beijing, worried about the effects of the trade war on its economy, also signaled to US business officials that it wanted to negotiate. For China's leaders, 2019 should be October 1st, the 70th anniversary of the Communist Party's rule, and its success in rescuing hundreds of millions of people from poverty. Instead, the trade war threatened to weaken the economy as unrest in Hong Kong and other challenges highlighted Mr. Xi's internal problems.

premier

Li Keqiang

and other senior officials stressed the importance of engagement to American executives to prevent tensions from getting out of control and believed that they would pass these views on to the White House.

In mid-September, China took action against Fentanyl, a Trump priority. She also said she would remove tariffs on some U.S. soybeans and pork. The United States reacted by delaying tariff increases.

Imported soybeans in a Chinese port in December.

Photo:

Xiao Yijiu / Xinua / Zuma Press

Best available offer

The US also discussed compromises behind the scenes. Mr. Trump had long directed his chief negotiator, the U.S. trade representative

Robert Lighthizer,

Now Mr. Lighthizer was looking for the best deal available.

The US and China signed a comprehensive agreement in May. However, it would have obliged China to amend up to 60 laws and regulations that cover intellectual property, regulatory review boards, financial services, and other areas. It fell apart when China's leading negotiator, Vice Premier Liu He, did not get top management approval.

give points

Highlights of the US-China trade agreement, as described by US agent Robert Lighthizer and his associates; Chinese officials have not yet given a detailed summary.

  • Buy Americans: Beijing plans to increase purchases of U.S. goods and services by at least $ 200 billion over the next two years, using it as a benchmark in 2017.
  • Tariff relief: The United States halved the duty rate from 15% to 7.5% on duties that penalize Chinese products worth approximately $ 120 billion including shoes and clothing on September 1. The United States also agreed not to impose any 15% tariffs on consumer goods valued at around $ 156 billion.
  • Technology transfer: China must stop forcing foreign companies to transfer technology to Chinese companies to gain access to the market.
  • Intellectual property: Actions to resolve intellectual property problems, unspecified.
  • Financial services: Remove obstacles to the expansion of US banks, insurance companies and other financial services companies in China.
  • Currency Dimensions: Measures to prevent China from devaluing its currency.
  • Dispute Resolution: A mutual agreement to resolve disputes through consultation.

Mr. Lighthizer, White House Economic Advisor

Larry Kudlow

and finance minister

Steven Mnuchin

was now trying to "pocket" the profits, as they called it, from previous negotiations, even if that meant repelling China's demands to eliminate subsidies and renew state-owned companies for the time being.

They advised Mr. Trump to show restraint. During the Oval Office meetings in August, the president threatened to double tariffs on $ 250 billion of Chinese goods to 50 percent. In the past, Mr. Lighthizer had asked him to raise interest rates to put pressure on China. Now he joined the other two to persuade the president to threaten only with a five percentage point increase – as a warning to Beijing, but small enough not to disrupt the negotiations. The President later delayed the implementation of the increase.

"Bob Lighthizer is not an ideologist. He is a realist," says the former Trump strategist

Stephen Bannon.

"His customer wanted a business as best he could."

Negotiators on both sides began to investigate a settlement with different phases. The first focused on agricultural purchases and other less controversial issues. It had been China's strategy for a long time. Since 2018, Chinese negotiators have implemented a so-called 40-40-20 plan: they said 40% of American demands could be implemented because they included reforms that China was planning anyway, 40% were negotiable and 20% were taboo and had an impact national security.

Mr. Lighthizer and other negotiators had previously mocked the effort privately because Beijing was classified as the off-limit that the United States gave priority to. This included the further opening of the Chinese cloud computing market. Now the United States was essentially ready to accept China's framework.

Chinese negotiators focused on three areas that were important to the US team, starting with increased purchases of U.S. agricultural products – a priority for Mr. Trump. China had largely stopped buying US grain to take revenge on tariffs and met its followers in farm states.

Beijing also offered compromises in the enforcement of the agreement, a priority for Mr. Lighthizer, and financial liberalization, a topic for Mr. Mnuchin.

When Mr. Kudlow worked out a possible deal for Mr. Trump in early October, the president replied, "I could be for it," even though he wanted to see what the Chinese offered.

The two negotiating teams met on October 10 at Lighthizer's Washington Metropolitan Club. The next day, the President invited Mr. Liu to the Oval Office and, with the television cameras present, announced what he called an "enormous" deal.

"I would suggest that farmers immediately buy more land and buy bigger tractors," he said. Beijing would buy $ 40 to $ 50 billion in agricultural products annually, roughly twice what the U.S. has ever bought. Mr. Liu did not contradict him, but did not confirm the claim.

Mr. Trump with Chinese Vice Premier Liu He in the Oval Office in October.

Photo:

Win McNamee / Getty Images

During the videoconferencing over the next two months, both sides argued over business details. Chinese negotiators continued to insist on balanced business and did not want them to give in to outside pressure.

To this end, the enforcement provisions have been renamed "bilateral assessment and dispute resolution," according to the Chinese state news agency Xinhua. The focus was on planned consultations on dispute settlement, rather than insisting that the US may charge fees if they were not satisfied.

Beijing also wanted the US to cut tariffs drastically. Again, Chinese negotiators divided the US claims into hundreds of items and determined that their offer covered 72% of the claims that they believed would be offset by a tariff cut.

In any case, Mr. Lighthizer replied, the Chinese offer was perhaps worth half. On October 31, the president tweeted that his offer covered 60%.

The controversy over percentages went back and forth. Mr. Lighthizer offered to cut tariffs on Chinese imports by 15% to 10% for $ 120 billion and drop plans to introduce new tariffs. This was the US's first offer to reduce tariffs since the start of the trade battle. But it left 25% tariffs on $ 250 billion in Chinese imports, about half of what China sold to the United States. Mr. Xi wanted all tariffs to be removed, or at least a schedule that reached zero tariffs.

The Chinese ambassador trusted Mr. Kushner to better read what Mr. Trump wanted. In Beijing, Mr. Kushner was a trusted broker who organized a Mar-a-Lago summit between Messrs. Xi and Trump a few months after the President took office.

After listening to Mr. Kushner's lawyer, the Chinese side was ready to agree if Mr. Lighthizer approved another compromise: cut the 15% tariffs to 7.5% instead of 10%. Both sides could live with it and clarify the remaining problems.

The US site was happy and began providing business details on December 12th.

Beijing's silence

The Chinese side was silent. The following working day in Beijing, none of China's state media or government agencies commented on the negotiations.

First, Mr. Xi had to agree to the deal, which he did. Then Beijing had to decide how the agreement should be implemented to ward off any domestic criticism. China made too many concessions.

By midnight on December 13th in Beijing, about 90 minutes after Mr. Trump tweeted, the site had reached "an amazing deal" and half a dozen deputy ministers held a rare press conference. They confirmed the deal but did not provide any details.

Negotiations continued, particularly regarding the translation of the text into Chinese, which could give Beijing scope for commitments. China's state media has largely remained calm on the deal.

"Because of the remaining uncertainty, we are told that we are ready," said a senior editor at a state-run news agency in Beijing. "But no news is good news," added the editor. "It shows that the top leader wants to make it here."

Before leaving for a New Year's Eve party in Mar-a-Lago, Mr. Trump told reporters that he would travel to Beijing in 2020 to hold talks on a second-phase deal, and hinted that Mr. Xi could travel to the US – a proposal from the president had previously made.

Mr. Xi Jinping with former U.S. Secretary of State Henry Kissinger at a meeting in Beijing in November.

Photo:

Jason Lee / PRESS POOL / SHUTTERSTOCK

Beijing has not confirmed travel plans. Chinese diplomats say they are primarily preparing for Mr. Xi's planned state visit to Japan in the spring.

The United States anticipates remaining tariffs to persuade Beijing to further negotiate and approve economic policy changes. Otherwise, Washington could use other pressure points, such as restricting the ability of Chinese companies to list shares in US markets.

However, Chinese officials believe that they have little benefit from a second-phase agreement that forces Beijing to facilitate state control over the economy, and Mr. Trump recently said that a second-phase agreement is likely to be first would be completed after the November 3 elections. The Chinese government continues to plan a future in which the two economies would be less intertwined and China would develop technology rather than relying on American imports.

When Mr. Xi met with a group of foreign figures, including ex-Secretary of State Henry Kissinger and ex-finance minister Hank Paulson, at a November forum in Beijing, he said to them: “We didn't start the trade war, but we won’t shy away from confrontation. .. Why should we change policies that work? "

Write to Bob Davis at bob.davis@wsj.com and Lingling Wei at lingling.wei@wsj.com

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