WASHINGTON / BEIJING (Reuters) – Beijing's diplomatic cable arrived in Washington late Friday night, with systematic changes to a nearly 150-page bargaining agreement that would inflict negotiation months between the world's two largest economies, according to three US states. Government sources and three private sector sources informed about the talks.
FILE PHOTO: Chinese Vice President Liu He, looking as US Treasury Secretary Steven Mnuchin, center, swaps with his trade representative Robert Lighthizer during a shooting session before moving on to his meeting at Diaoyutai State Guesthouse in Beijing, Wednesday 1 May 2019. Andy Wong / Pool via REUTERS
The document was riddled with reversals of China that undermined core US demands, the sources told Reuters.
In each of the seven chapters of the draft trade agreement, China had deleted its obligations to amend laws to resolve core cases that caused the United States to launch a trade war: the theft of US intellectual property and trade secrets; forced technology transfers; competition policy; access to financial services; and currency manipulation.
US President Donald Trump responded in a tweet on Sunday to raise rates of $ 200 billion of Chinese goods from 10 to 25 percent on Friday – timed to land in the midst of a scheduled visit by China's Vice President Liu He to Washington to continue trade negotiations.
The abolition of binding legal language from the draft hit directly at the highest priority of US trade representative Robert Lighthizer – who looks at changes in Chinese law as crucial to verifying compliance by year of which US officials have called empty reform laws.
Lighthizer has pushed hard for an enforcement regime such as those used for criminal sanctions – such as those imposed on North Korea or Iran – than a typical trade agreement.
"This undermines the core architecture of the deal," said a Washington-based source of knowledge of the talks.
White House spokesmen, US trade representative and US Treasury Department did not respond promptly to comment requests.
The spokesman for the Chinese Foreign Ministry, Geng Shuang, told a briefing on Wednesday that there was a "negotiation process" that prepared trade disputes and that China did not "avoid problems".
Geng referred specific questions about the trade negotiations to the Ministry of Commerce, which did not respond immediately to faxed questions from Reuters.
Lighthouse and US Treasury Secretary Steven Mnuchin was surprised at the extent of the changes in the draft. The two government officials on Monday told reporters that Chinese backtracking had prompted Trump's tariff order, but did not provide details on the depth and breadth of the audits.
Last week, Liu told Lighthizer and Mnuchin that they needed to rely on China to fulfill its promises through administrative and regulatory changes, two sources said. Both Mnuchin and Lighthizer considered it unacceptable, given China's history of failing to comply with the reform law.
A private sector source informed about the talks said that the last round of negotiations had gone very bad because "China became greedy".
"China reneged on a dozen things, if not more … The talks were so bad that the real surprise is that it took Trump to Sunday to blast," the source said.
"After 20 years of traveling with the United States, China still seems to be miscalculating with this administration."
FURTHER TALK THIS WEEK
The rapid deterioration of negotiations overthrew global stock markets, bonds and lasts this week. Until Sunday, the markets had priced in anticipation that officials from the two countries were close to reaching an agreement.
Investors and analysts asked if Trump's tweet was a negotiating role to turn more concessions from China. The sources told Reuters the extent of the setbacks in the revised text was serious and that Trump's response was not just a negotiating strategy.
Chinese dealers said they could not touch the laws, one of the government sources said, calling the changes "major".
Changing any law in China requires a unique set of processes that cannot be navigated quickly, a Chinese official told the talks. The official disputes the claim that China was reluctant to make its promises, adding that US demands became more "harsh" and the way to an agreement "narrow" as the negotiations go.
Liu is set to arrive in Washington on Thursday for two days of talks which last week were widely regarded as central – a possible last round before a historic trade. Now, US officials have little expectation that Liu will come up with any offer that can get calls again, two of the sources said.
To avert escalation, some sources said that Liu had to cut China's proposed text changes and accept new laws. China will also have to move towards the US position at other points of interest, such as limitations on Chinese industrial subsidies and a streamlined approval process for genetically engineered US crops.
The administration said that the latest tariff escalation will come into effect at 12:01 pm, Friday, hiking on Chinese products such as internet modems and routers, printed circuit boards, vacuum cleaners and furniture.
The Chinese reversal can give China's hawks in the Trump administration, including Lighthizer, an opening to take a harder attitude.
Mnuchin – who has been more open to an agreement with better market access, and sometimes collided with the Lighthizer – appeared in synchronization with Lighthizer in explaining the changes to journalists on Monday while still allowing new rates to be averted with a deal.
Trump's tweets left no room for backup, and Lighthizer made it clear that despite continued calls, "arrived Friday, there will be tariffs in place."
Additional reporting by Chris Prentice in NEW YORK and Jing Xu and Ben Blanchard in BEIJING; Editing by Simon Webb and Brian Thevenot