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Tariffs push China and US back to the negotiating table, talks begin next week

FILE - In this Nov. 9, 2017, file photo, U.S. President Donald Trump, right, chats with Chinese President Xi Jinping during a welcome ceremony at the Great Hall of the People in Beijing. (AP Photo/Andy Wong, File)

U.S. and Chinese officials will meet in Washington next week for the first time since the start of the trade war that has led each country to impose tariffs on tens of billions of dollars worth of goods.

Mid-level representatives from the U.S. Treasury and Chinese Commerce Ministry are expected to meet on August 22-23 for "exploratory" talks, to see if either side is prepared to step back from the precipice and seriously negotiate a resolution to long-standing trade disputes.

According to reports, next week's meeting will also begin to set the stage for a meeting between U.S. President Donald Trump and Chinese President Xi Jinping at the Asia-Pacific Economic Cooperation (APEC) forum in November.

The talks will take place while the Trump administration is actively preparing another round of tariffs as high as 25 percent on $200 billion of Chinese goods. China has vowed to retaliate but imports less than $130 billion from the United States.

The discussions will also occur as the second tranche of U.S. and Chinese retaliatory tariffs worth $16 billion officially take effect. By August 23, both the United States and China will have imposed a 25 percent tariff on a total of $50 billion worth of exports.

The fact that China agreed to send a delegation to Washington has been interpreted as a sign that the Trump administration's tariffs are having their intended effect, putting the squeeze on China with only limited economic impacts on the United States.

PLAYING THE TRUMP CARD

At a Thursday Cabinet meeting, President Donald Trump pressed Larry Kudlow, director of the National Economic Council, to compare China's economic performance with that of the United States.

Kudlow gave a glowing appraisal of a "booming" U.S. economy, attracting trillions of dollars in foreign investments and expanding at a rate of 4.1 percent as of last quarter. "Our economy, our investors, our workforce are crushing it right now," he said.

China has been losing momentum for the better part of a year, Kudlow said. "Their economy looks terrible."

Between Trump's tariffs and underlying economic challenges, China is feeling the pressure and now looking for a way out, said Gordon Chang, author of "The Coming Collapse of China."

"I think the Chinese really want a deal," he said. Economically the country is "very fragile," highly dependent on the U.S. market for its goods and its gross domestic product (GDP) is growing at a slower rate than recent years, and likely far below the officially reported rate of 6.7 percent.

"With what little President Trump has done by these tariffs, which is really on $34 billion, and by signaling the United States is taking a more difficult attitude toward China is he's caused a lot of disruption in the Chinese economy," Chang continued. "That has caused problems in the Chinese political system... Now you have twin problems and they're feeding on each other."

Since President Donald Trump began actively pursuing trade penalties against China, the country's largely export-driven economy has taken a hit. On top of long-term projections of lower productivity and higher debt, investors are pulling out of China. The currency is depreciating making it harder to attract capital and the stock market has plunged more than 12 percent in three months.

These factors have contributed to China's motivation to restart trade talks with the United States, explained Dr. Gary Clyde Hufbauer, an international trade economist and senior fellow at the Peterson Institute for International Economics.

"The tariffs have had the effect of at least making China willing to talk, even eager to talk," he said. The increased duties "are imposing real pain in China, not only on the wealthy but ordinary people who are involved in export production."

China's retaliatory tariffs have also caused pain in the United States, particularly for farmers, but the effects have been relatively limited. Overall, China is more exposed than the United States when it comes to penalties on trade. For example, the United States accounts for 20 percent of China's export market. U.S. trade is more diverse in terms of products and destinations with China accounting for roughly 8 percent of exported goods.

"In economic terms, we're more resilient," said Hufbauer. "In political terms, we're less resilient."

Trump's political critics have blasted his trade actions, warning of a trade war and economic slowdown. Ahead of the November midterms, some polls show Trump losing support in traditionally red states, like Iowa and parts of Minnesota, where farmers are being hurt by the trade war.

Meanwhile, a number of Republicans and Democrats in Congress have responded to their constituents' economic pain and are attempting to curb Trump's authority to unilaterally impose tariffs without congressional approval.

For years, the United States has had economic leverage over China, Chang explained but never had the political will to use it.

Instead, Republican and Democratic administrations have consistently supported China's economy over the past four decades, often at the expense of the U.S. interests. "We hold most of the high cards," Chang continued. "What President Trump is doing is making a necessary historic pivot. This is an inflection point in relations between the United States and China."

Despite these political factors, the White House has not indicated it will back down from an economic fight with China.

In a Thursday interview with CNBC, Larry Kudlow stressed, "The Chinese government, in its totality, must not underestimate President Trump's toughness and willingness to continue this battle to eliminate tariffs and nontariff barriers and quotas, to stop the theft of intellectual property and to stop the forced transfer of technology."

Kudlow made it clear that going into the meetings next week, those issues will be on the table. "Those are the asks that we've been making now for quite some time."

ECONOMIC 'DEATHMATCH'

The talks next week will be held at a lower level than previous trade negotiations. The U.S. delegation will be led by Treasury Undersecretary David Malpass and China is expected to send its Vice Commerce Minister Wang Shouwen.

The parties are expected to discuss the ongoing trade dispute and could potentially set a path forward to restart official negotiations between Beijing and Washington.

The Office of the Trade Representative, not the Treasury is responsible for trade negotiations and tariffs and there has been no indication that the U.S. Trade Representative Robert Lighthizer or one of his representatives will attend the meeting. This has led some to question the value of the talks and created very low expectations.

Hufbauer is skeptical there will be any breakthrough next week, noting China could offer concessions, such as temporarily lifting the tariff on soybeans, but it would be a bitter pill to swallow. "I think we're going to have rocky relations with China for the duration of the Trump presidency," he said.

In the broader scheme of U.S. demands, some question whether China is willing or able to make the concessions the Trump administration has outlined, (namely ending intellectual property theft, stopping forced technology transfers, lowering trade barriers and allowing more goods to be sold in China to reduce the trade deficit).

These demands are more likely to create an impasse. According to Gordon Chang, for China to stop its practice of intellectual property theft, the reason the United States imposed tariffs, would cut at the heart of what China's leaders believe is the key to its economic success.

"What President Trump wants is a fundamental change in China's economic system and that is pretty unlikely," he noted. "So this looks like a deathmatch. There's only one economy that is going to survive this."

At his Thursday Cabinet meeting, Trump appeared unmoved in his expectations for the U.S.-China trade relationship. "They very much want to talk. They are just not able to give us a deal that's acceptable. So we're not going to do any deal until we get one that's fair to our country."

Earlier this year, Washington and Beijing were engaged in high-level talks that appeared to be working to stave off a trade war. By late May, the two sides appeared to be close to a deal.

In exchange for the Trump administration abandoning its threatened tariffs, China agreed to purchase $70 billion worth of U.S. goods, which would have cut the U.S.-China trade deficit by 18 percent. Trump had sought a $200 billion reduction.

Treasury Secretary Steve Mnuchin told his counterpart that the administration would postpone its proposed tariffs while finalizing the agreement. Before the deal was signed, the White House announced plans to impose the first round of $34 billion China tariffs by July. The trade talks collapsed, China retaliated in kind and the two sides have not held official trade talks for more than two months.

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