US-China trade war – 6: Negotiating once more

Negotiation: “Bargaining (give and take) process between two or more parties (each with its own aims, needs, and viewpoints) seeking to discover a common ground and reach an agreement to settle a matter of mutual concern or resolve a conflict.” (Business Dictionary)

Negotiations are stage 2.  The key, the only key to the trade war challenges.  So far, negotiations are not going well.  We were told that the Chinese reneged on their deal, and we saw the following messages:

“For 10 months, China has been paying Tariffs to the USA of 25% on 50 Billion Dollars of High Tech, and 10% on 200 Billion Dollars of other goods. These payments are partially responsible for our great economic results, the 10% will go up to 25% on Friday.” (Trump’s May 5^th tweet)

“The Trade Deal with China continues, but too slowly, as they attempt to renegotiate. No!”  (Trump’s May 5^th tweet)

Putting aside the illogical rationale that tariffs improve economic results (they do not), the above tone does not give us much reason to be hopeful about an agreement breakthrough.  But grandstanding is part of the negotiation process.

Let us be very clear: what the negotiators are attempting to do is immensely hard.  They want to change decades-long agreements and behavior involving reams of complex details and issues not to mention sovereign pride and respect.  And they want to nail down a deal that will last decades into the future.  All these in the context of a vast cultural divide and the stress caused by the rapid and challenging rise of a powerful nation.

Recognition must be given to those determined to make a change and to the negotiators who have persevered so far.  But on the surface, it does appear unlikely that they will succeed.

The question is whether both parties have a genuine desire by to reach an agreement.

“Negotiation in the classic diplomatic sense assumes parties more anxious to agree than to disagree.” – Dean Acheson

We have reasons to believe that there such a desire.  China has been consistent in its message that it wants to find a solution.  The US less so, but Trump’s willingness to meet with Xi Jinping during the June 28-29 G20 summit in Osaka is cause for some optimism.

Derailment – what went wrong in May?

Lets look at what happened in May to help us understand what could happen next.  We do not know the details, but we understand that consensus had been reached on many topics.

Craig Allen, president of the US-China Business Council, nicely summarized the situation recently by using a business analogy and pointing out that a deal had basically been reached, but that “They told their lawyers go and write down the agreement. When the lawyers came back with the agreement, they said ‘oh my god, that’s not what we agreed’. This is quite normal in trade negotiations, in any negotiation. You can reach an agreement in principle, but the actual details are much more difficult” (See SCMP article of June 21)

Those of us who have negotiated agreements in China, especially complex ones, realize how true this is.  Prolonged discussions eventually lead to a meeting of minds, a handshake, and then the agreement must be documented.   Words on paper are unforgiving and usually causes a number of problems, including:

• Ideas have to be presented in clear legal terms without offending the parties.
• Intent must be supported by enforcement mechanisms legally valid in both countries
• Translations can be very tricky
• Third party review of the written agreement often leads to objections

If the agreement process is hard for relatively simple commercial deals, one can imagine how hard it must be for such a huge endeavor.

On top of that, we should consider the human element: the two negotiation teams are large, which is normal, given the task they face, but it can also be problematic – “too many cooks spoil the broth”.

Robert Lighthizer (US Trade Representative); Steven Mnuchin (Treasury Secretary) and Wilbur Ross (Secretary of Commerce) are all accomplished and opinionated negotiators who may have different objectives and views on certain words or concepts in the final agreement.

Liu He (Chinese Vice-Premier) too would be confronted by his own hawks and doves and be called upon to explain why specific details were agreed, especially given China’s sensitivity about respect and sovereignty.   And then both parties would be back at the negotiation table, with additional stress and perhaps forced to change certain terms that had previously agreed on.  All this is quite predictable.

On the plus side, the negotiators will benefit from the work done so far.  Dealing with an existing document is easier than to create one.  But in the process of fine-tuning it they must consider at least 3 things:

• Be mindful of deal breakers. Each party has certain conditions that are not negotiable; these are:

• For the US:
  • Steps taken towards a trade balance must be clear;
  • Tariffs must be made equal (eventually);
  • Clear commitment to provide fair access to the China market
  • Consensus must be reached on IP issues
  • Commitments must be verifiable and enforceable.
• For China:
  • Tariffs must be rolled back to ‘status quo ante’
  • Sovereignty must be respected, meaning that the US can demand results, but cannot dictate by what internal steps China will secure them.
  • China must be treated with respect, as an equal.

• Have a clear focus on issues: This is a trade dispute and the arguments must be confined to facts of trade.  Negotiators should not attempt to fix all US-China relations with this one agreement.  They should not involve other considerations such as:
  • Concerns about China’s growing economic strength
  • The competitive rise of China’s hi-tech industry
  • China’s reforms and political system
• Ensure legitimacy:  Proposals must be seen as legitimate and fair.  And commitments must be binding and not easily changeable.

In the end it will be up to both Trump and Xi Jinping to decide, and politics will be their main motivator.  This issue will not go away, it dominates the news, it affects all major stock markets and the longer it lasts the more damage it causes.  The trade issue will have to be fixed, sooner or later.  The concern now is timing: the leaders have to decide whether it is better to finalize things now, or to prolong the trade war – and fix it later.  Which of these two choices benefits them most?

Trump has just kicked off his 2020 re-election bid and he needs to focus on what will be an arduous task.  He neither needs, nor should he want the distraction of a trade war to derail his bid, especially if a bungled agreement weakens the US economy by the time we get to October 2020.  Moreover, an agreement with China on trade would make him look good: so far, he has disrupted global trade, but he did not manage to put anything stable or new in its place.

Xi Jinping, on the other hand, does not need to worry about elections – ever.  But there is rumbling within the Party about him damaging relations with the US; there are serious concerns about the economy and he has to be mindful that US elections are unlikely to provide relief: a Democrat in the White House will not necessarily make negotiations any easier.  An agreement now, provided it is not seen as a loss of face, will also make him look good.

“Where there’s a will, there’s a way.”  Better for both to act now, find common ground and finalize an agreement.

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