An Interim U.S.-China deal? The Trump administration is reportedly mulling offering a limited, temporary trade agreement to Beijing. According to Bloomberg, the deal would delay new tariffs and even roll back some existing duties for the first time in exchange for Chinese pledges on intellectual property and agricultural purchases. U.S. President Donald Trump on Thursday was non-committal, acknowledging the possibility of an interim deal but expressing a clear preference for something comprehensive. An unnamed senior White House official told CNBC that an interim deal was “absolutely not” on the table. Regardless, both sides have ample interest in at least avoiding the mutual economic fallout that would come with further escalation – and making gestures to boost the chances of success in the upcoming talks. In addition to suspending some tariffs on U.S. goods for a year, for example, China has reportedly ramped up orders of U.S. farm products. China’s top trade negotiator, Vice Premier Liu He, said a working-level meeting would take place next week to prepare for the October talks. According to Liu, the October talks will focus on “trade balance, market entry and investor protection” – areas where Beijing has some ability to concede on measures that it needs or wants to concede on anyway. This also means U.S. demands for structural reforms such as a dramatic reduction in the state’s role in the Chinese economy are almost certainly still off the table. (See: the next item.) In our annual forecast, we predicted that the Trump administration would be forced to settle for a slimmed-down trade deal that did little to address the underlying sources of U.S.-China trade tension. The “mini deal” that may be within reach this fall would amount to exactly that. Still, since most U.S. tariffs will remain in place, talks will inevitably continue in fits and starts on an elusive grand bargain.
Trade and Hong Kong. U.S. Treasury Secretary Steven Mnuchin said Thursday that the Hong Kong protests are “not a trade issue” and will not be on the negotiating table when the U.S. and Chinese trade delegations meet in October. Notably, though, Reuters reported that China’s powerful state-owned Assets Supervision and Administration Commission held a meeting this week with leaders from hundreds of Chinese state-owned enterprises to urge them to invest more in important Hong Kong industries – and to seek decision-making power in Hong Kong firms. For the trade negotiations, this underscores the reality that Beijing has no plans to cave on some of the U.S.’ biggest grievances regarding the state’s role in the Chinese economy. Rather, the stress of the trade war, the budding global downturn and China’s structural slowdown are forcing Beijing to lean even more heavily on its SOEs, which play critical roles in stabilizing employment at home and in executing Chinese diplomatic goals in things like the Belt and Road Initiative. For Hong Kong’s future, well, this is part and parcel of Beijing’s patient, long-term approach to gradually expanding its control over the city and discouraging support from the business community for the protesters. Yet, as with everything Hong Kong, Beijing can’t push too hard here. While Hong Kong’s economic importance to the mainland has gradually diminished with the rise of special economic zones like Shenzhen, the U.S.-China trade war has underscored the reality that Hong Kong will remain an indispensable gateway for capital inflows, attaching steep costs to any move by Beijing that erodes Hong Kong’s reputation as a relatively stable and transparent place to do business.
Malaysia makes nice. A key Belt and Road Initiative rail project in Malaysia is officially back on track, according Chinese Foreign Minister Wang Yi, who hosted his Malaysian counterpart, Saifuddin Abdullah, in Beijing on Thursday. The China-backed East Coast Rail Link was suspended by Malaysian Prime Minister Mahathir Mohamad after he returned to office in 2018 amid a BRI-related corruption scandal that ousted his predecessor. Malaysia has been able to renegotiate the project on much more favorable terms, underscoring the reality that China often needs its BRI partners as much as they need China, giving them ample leverage. Meanwhile, China and Malaysia also agreed to set up a joint dialogue mechanism for managing the two countries’ disputes in the South China Sea, according to Wang. This comes as Chinese coast guard and maritime militia vessels have been amping up harassment of Vietnamese and Malaysian oil and gas operations on the fringes of China’s ravenous maritime claims. Malaysia will do everything in its power to avoid picking sides in the great power competition unfolding on its doorstep.
Honorable Mentions
- The U.S. Navy conducted a freedom of navigation operation in the disputed Paracel Islands in the South China Sea.
- Wages in the eurozone increased at their fastest pace in more than a decade in the second quarter.
- A new report by the European Court of Auditors warned that European Union states’ current military capabilities and cooperation fall short of what’s needed to execute the bloc’s defense policy.
- Paris ground to a halt on Friday due to a transportation strike protesting French President Emmanuel Macron’s proposed pension reforms.
- Irish Prime Minister Leo Varadkar cast doubt on the ability of EU and British Brexit negotiators to overcome the gulf in the two sides’ positions.
- The leaders of Russia, Turkey and Iran will meet in Ankara on Monday to discuss the situation in Syria’s Idlib province.
- The U.S. is renewing its diplomatic push to persuade allies in the Middle East to avoid using Huawei technology in their 5G infrastructure.
