COMMENTARY: Could Concessions to the U.S. on Trade Show Chinese Strength?

Former chairman of Ex-Im Bank of China says Beijing can tackle major reforms and help solve the trade war without displaying weakness.

Mark Melnicoe
    Dec 14, 2019 5:00 AM  PT
COMMENTARY: Could Concessions to the U.S. on Trade Show Chinese Strength?
author: Mark Melnicoe   

Amid new hope for thawing trade relations between the U.S. and China, a provocative suggestion came this week from a former chairman of the Export-Import Bank of China.

Ruogu Li told an economic forum last Saturday that his country needs to make bolder moves on structural reform, partly in a bid to end the trade war. He said making meaningful changes sought by U.S. trade negotiators would be a sign of strength, according to an account from the South China Morning Post.

"A consensus is that further reforms and opening up are needed to tackle bilateral and domestic economic problems," Li told the Sanya Forum in the island province of Hainan.

Without saying who was forming that "consensus," Li suggested that China's leaders study the U.S. demands and make some necessary concessions.

"This is very important," he said. "China has long said that it supports globalization and vowed to build a community with common destiny."

"The question is, should we treat the West and the United States as human beings and include them? Making concessions is not (a sign of being) weak. Instead, it is an act of the strong."

Whether this sentiment gets through to President Xi Jinping and China's negotiating team, led by Liu He, is questionable. In terms of different opinions, the Chinese government is less monolithic than most Westerners presume and the Communist Party is divided on how far to push reforms forward.

Reports about a pending phase-one trade deal likely do not reflect Li's speech or even his particular position. If it goes through, the deal is significant in that it averts new U.S. tariffs scheduled to take effect Sunday on $160 billion in Chinese imports and rolls back existing tariffs on another $360 billion in products by as much as half. It commits China to buying more American products, doing more to protect intellectual property and agreeing not to manipulate its currency, the yuan.

But the accord by no means solves the main issues separating the two countries on trade. Those bigger problems will require many more negotiations.

From Law to Action

Li, who is also a former deputy director of the People's Bank of China, sits firmly in Beijing's pro-reform camp. He noted some of the openings that ministries have taken to help the economy but said the implementation often has been weak.

That echoes longstanding complaints from Western businesses: Beijing passes laws at the top levels to allow more foreign investment or to open certain sectors to multinational companies, only to lag – sometimes for years - in actually making those changes happen.

U.S. and European countries have long pushed for true reforms. They want a level playing field to access China's giant consumer and business markets. They want real intellectual property protections with court rulings that are impartial. They want Beijing to stop massive subsidies to state-owned enterprises. And they seek laws that are clear and enforced at all levels of government.

"Even (when) the schemes are released, the old question remains of how these ministries or agencies implement it in practice," Li told the Sanya Forum. "If (these promises are) fulfilled, U.S.-China conflicts can be solved."

Li is far from the first to suggest China move faster on reforms. In October, Jinglian Wu, who the SCMP calls the "spiritual guru of China's pro-market camp," voiced similar concerns and called for the pace of reform to be speeded up.

A Lose-Win Question

What's significant here is what Li is saying about showing strength instead of weakness. Xi, a highly authoritarian leader, cannot afford to "lose face" in the trade war to an American president who frequently lambastes China's actions. With his harsh rhetoric, Trump leaves no room for subtleties, and there's little doubt that he will trumpet any agreement as a big win for the U.S.

So if the Chinese side is considering bending to U.S. demands, it must be careful in how it portrays this to its people. For one, it likely will point out that many of the reforms it's undertaking have been in the works for a long time –before the 20-month-old trade war began.

There is truth to this. Beijing has spent years rewriting its laws on foreign investment, IP rights and foreign access for different product categories. The pending first-phase agreement has China opening its financial services sector, a move Beijing also has already launched.

Beijing could argue that the only real concession it's making is to buy more American agricultural products. It wants some of this anyway, particularly pork, which has seen a doubling in price over the past year because of African swine fever.

Thus, China can be seen as the winner in the pending phase-one deal. In exchange for things it's mostly already doing, it gets rid of tariffs and potential tariffs on half a trillion dollars in goods that have torn into its manufacturing exports.

The next step – doing as Li suggests and yielding to U.S. pressure on other aspects of reform – is the hard part. The reformists argue that China would be better off doing what the U.S. wants anyway. True reform could be Beijing's ticket out of an economic squeeze that is pinching at the country's GDP growth, which at around 6% is sitting at generational lows and still dropping.