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U.S. Shutdown Shows China That Calling Trump’s Trade Bluff Might Work

Bloomberg logo Bloomberg 2019-01-29 Andrew Mayeda and Ye Xie

Nancy Pelosi et al. posing for the camera © Photographer: Al Drago/Bloomberg pelosi (Bloomberg) -- China’s trade negotiators visiting Washington this week to hammer out a deal with the U.S. may look to borrow a tactic from the Democrats’ shutdown playbook against President Donald Trump: calling his bluff.

Trump oversaw the longest government shutdown in U.S. history, demanding funds for a border wall he called vital for national security. House Speaker Nancy Pelosi refused to capitulate, and after 35 days with 800,000 workers furloughed or working without pay, Trump relented on Friday and agreed to reopen the government with no wall funding.

The president accepted a deal to continue funding for the shuttered departments until Feb. 15 to allow for bipartisan negotiations on a border-security plan. With less than two years until the next presidential election, China may be looking for a similar way to defuse Trump’s demands in the short term and stall on the big decisions.

Now Trump shifts to another standoff where he’s threatened an opponent with painful penalties -- one with a much larger implications for the global economy. Trump is expected to meet with Chinese Vice Premier Liu He during negotiations on Wednesday and Thursday. Trump and Chinese President Xi Jinping have given their officials until March 1 to reach a lasting truce in their trade war.

Administration officials are pressing the Chinese to do more than just ramp up purchases of U.S. products such as soybeans and natural gas. The U.S. is proposing tough enforcement provisions that would force the Chinese to keep their promises as officials from Beijing make “structural” changes to their state-driven economic model and abide by U.S. intellectual property protections.

But the Chinese will be reluctant to make deep changes to their economic system, which fueled the nation’s rise. In a phone call with Trump late last month, Xi expressed hope for a deal that benefits both countries, Xinhua News reported.

Lines Drawn

Chinese negotiators will probably make clear to the U.S. this week what they’re willing to accept, said Michael Pillsbury, senior fellow at the Hudson Institute in Washington.

“They have obviously come to educate the American side on what is low-hanging fruit versus what cannot be negotiated,” Pillsbury, a former U.S. defense official whom Trump has called a leading expert on China, told Bloomberg Television on Tuesday. “They will draw the line.”

Day Two Of The World Economic Forum (WEF) 2018 © Bloomberg Day Two Of The World Economic Forum (WEF) 2018

But Trump does enter the talks with some leverage. U.S. prosecutors this week filed criminal charges against Huawei Technologies Co., accusing the company of stealing trade secrets and committing bank fraud -- a case that will probably play into the trade negotiations, said Pillsbury.

“The U.S. and China have negotiated a lot of different things over the last 45 years and there is a certain cycle or pattern to these negotiations, and usually applying pressure at the last-minute through other means can be quite important,” he said. “We are getting down to the last minute.”

What Our Economists Say:

“Our base case is that China, eager to avoid 25 percent tariffs, packages together enough concessions for the U.S. to declare a win. A risk to that scenario is that China calls President Trump’s bluff -- betting that fears of a renewed market slump will tie the hands of U.S. negotiators.”

-- Tom Orlik, Bloomberg Economics

In at least one respect, the shutdown showdown is different than the trade war with China. Trump has bipartisan support in Congress to get tough with Beijing.

Still, there’s a perception that his leverage is shrinking as the U.S. economy slows amid tariff uncertainty, making him more likely to cut a deal that falls short of his ambitious demands.

Anxiety over the trade war contributed to a steep drop in U.S. stocks at the end of last year, and there are signs the conflict is eating into global growth. The economic cost of the shutdown -- which the Congressional Budget Office has estimated at $3 billion in permanent losses -- would pale in comparison to the damage of a protracted trade conflict.

Some believe a deal focused on Chinese purchases of specific products won’t solve the underlying imbalances between the two countries.

“A deal limited to Chinese purchases of U.S. products at the expense of other exporters” would “just rearrange problems, not solve them,” Center for Strategic and International Studies experts Daniel Rosen and Scott Kennedy wrote in a commentary this week.

--With assistance from David Westin.

To contact the reporters on this story: Andrew Mayeda in Washington at amayeda@bloomberg.net;Ye Xie in New York at yxie6@bloomberg.net

To contact the editors responsible for this story: Brendan Murray at brmurray@bloomberg.net, Sarah McGregor

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