China offers concessions to avert trade war with US

Financial Times, April 09, 2017
Xi affords Trump prospect of quick wins on market access in finance and beef

China will offer the Trump administration better market access for financial sector investments and US beef exports to help avert a trade war according to Chinese and US officials involved in talks between the two governments.

US President Donald Trump and Xi Jinping, his Chinese counterpart, decided at their first meeting in Florida last week that they needed rushed trade negotiations to produce results within 100 days. The two concessions on finance and beef are relatively easy for Beijing to make.

At present, foreign investors cannot hold a majority stake in securities and insurance companies in China. The country’s largest companies in these sectors, such as Citic Securities and China Life Insurance, have achieved enormous scale in the 15 years since the world’s second biggest economy joined the World Trade Organisation, making them formidable competitors for new entrants to the market.

The concession to allow majority foreign ownership was discussed during Barack Obama’s administration, when Chinese and US negotiators held several rounds of talks about a bilateral investment treaty, or BIT.

Mr Trump has not yet said if he intends to pursue the treaty, which US negotiators hoped would address China market access issues in a wide range of industries.
“China was prepared to [raise the investment ceilings in the BIT but those negotiations were put on hold after Trump’s election victory],” said one Chinese official involved in the talks. “Had Obama been in office for another six months we would have gotten there.” China is also willing to end a ban on US beef imports that has been in place since 2003, officials said, and buy more grains and other agricultural products as it seeks to reduce tensions stemming from the $347bn annual trade surplus in goods that it enjoys with its biggest trading partner.

Mr Trump’s campaign threats last year to slap tariffs on Chinese goods and declare Beijing a currency manipulator have raised fears of a destructive trade war between the world’s two largest economies. But since taking office the former reality television star has moderated his rhetoric and cabinet officials have signalled they plan to take a more pragmatic approach.

If concluded, the mooted deal would be welcomed by US financial services companies, which have grown increasingly frustrated in recent years about what they say are rising barriers to doing business in the country. Beef exporters have also complained about the lingering Chinese ban on US imports, which was introduced after a BSE scare in the US herd.

While a comprehensive Sino-US investment treaty remains a distant prospect, both sides are hoping to achieve a number of smaller trade deals in the coming three months. On Saturday, Mr Trump tweeted that Mr Xi’s two-day visit to his resort at Mar-a-Lago had been “tremendous”, before adding a warning shot. “Goodwill and friendship was formed,” the US president said in a follow-up tweet. “But only time will tell on trade.”

US officials are pressing their Chinese counterparts to lower their current 25 per cent tariff on automotive imports. Beijing in return would like greater protection for Chinese investment in the US, which tripled last year to more than $45bn, and also for Washington to relax restrictions on the sale of
certain high-tech products to China.

The Chinese government may simply commit to buy more US imports in the same way that Japan did in the 1980s. Chad Bown, a trade expert at the Peterson Institute for International Economics, said such a transactional approach would potentially help reduce the US trade deficit in the short term and appeal to Mr Trump’s instincts as a dealmaker. But it would have its limits.

“We’re not going to export a whole lot of steel to China,” Mr Bown said. Thanks to a state directed investment stimulus unleashed in the wake of the global financial crisis, Chinese steelmakers now produce more steel than the rest of the world combined. With the Chinese economy now growing at its slowest pace in a quarter century, reduced demand at home has led to a surge in steel exports, causing global prices to collapse.

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