Robert Lighthizer was now indisputably America’s chief China negotiator. While the trade battle was on hold for now and he wanted a deal, he wasn’t willing to settle cheaply.
To start, he wanted to make clear to his Chinese counterparts seated across the table from him in the Eisenhower Executive Office Building on January 30, 2019, how important the issue of enforcement was. The United States and China had decades of negotiations where Beijing pledged to open its markets fully to American businesses and ease pressure on them to hand over technology. But progress had been scant, he believed. The agreement the two sides were negotiating had to be backed up by strong enforcement—namely tariffs—to make sure any pledges were carried out.
Beijing should understand that, he said. The Chinese sage Confucius had said as much, more than two thousand years earlier. Citing a passage from Confucius’s Analects, Lighthizer told the group: “In the past when I evaluated a person, I believed what they said. Now when I evaluate a person, I listen to them, then I see what they do.” The Americans would only be satisfied, Lighthizer made clear, when they saw the Chinese do what they said they would do.
Chinese negotiators still weren’t sure what to make of Lighthizer. They had studied his history as a young U.S. trade negotiator with Japan in the 1980s during his “missile man” days. Lighthizer had negotiated restrictions on imports of Japanese steel, which China thought had weakened Japan’s trade-powered economy and which Beijing was determined not to repeat. They knew Lighthizer grew rich suing Chinese steel mills as a lawyer, and that he upbraided Chinese economic policies in opinion pieces and congressional testimony. They recalled his blunt talk to Xi Jinping laying out U.S. complaints about China during Trump’s November 2017 visit to Beijing.
The Chinese had tried to go around him by dealing with Treasury Secretary Mnuchin, but that hadn’t worked. They were stuck with Lighthizer.
On the plus side for Beijing, Lighthizer clearly had the ear of President Trump on trade. Any deal that he endorsed was more likely to be approved by a president that the Chinese viewed as fickle and unpredictable. The Americans tried to emphasize their seriousness by pairing Lighthizer with Mnuchin in talks with Vice Premier Liu He and his team.
Initially, the president was reluctant to continue to give Mnuchin a big role in the talks. Trump was angry at him for recommending Jay Powell to head the Federal Reserve, which the president believed didn’t do nearly enough to support him in his trade battle. Besides, Mnuchin was a dove on China and Trump wanted a hard-ass negotiator.
During a contentious Oval Office meeting shortly before the Buenos Aires summit, White House economic adviser Larry Kudlow pushed to add Mnuchin over the stiff objections of trade hawk Peter Navarro. Mnuchin needed to be deeply involved in negotiations important to the global economy and had served the president well, Kudlow argued. Eventually Trump relented. “You can’t have negotiations with a country like China without the Treasury secretary,” Kudlow says in an interview.1
The symbolism of pairing Lighthizer and Mnuchin was powerful: China was now negotiating with both the nationalist and globalist wings of the administration. The Lighthizer-Mnuchin combination could deflect criticism at home from either anti-China populists or business groups.
Although Trump officials went out of their way to disparage their predecessors, the Lighthizer-Mnuchin pairing was a repeat of Clinton White House tactics during negotiations over China’s entry into the World Trade Organization. Trade Representative Charlene Barshefsky and one of her opponents on China, National Economic Council Director Gene Sperling, led the final negotiations to show Beijing that Clinton was serious about a deal.
Still, the two nations were a long way from an agreement. That was evident during an earlier January meeting in Beijing of less-senior economic officials.
The American negotiators spent the first day of the early January sessions at China’s Commerce Ministry going through their demands that China stop technology theft and slash government aid to favored companies and sectors. Their Chinese peers gave little ground. The second day, the U.S. team pressed for details on the ramped-up purchases of farm goods and energy products China had said it would make. How much would China buy and when? The Chinese side balked at making specific commitments.
Mistrust of Washington ran deep in the Zhongnanhai leadership compound. If China spelled out its purchase plans, a Chinese policy maker asked at the time, “will the U.S. side keep coming back for more?”
Still both sides showed goodwill. Liu He made a brief appearance to wish the negotiators well, a courtesy that was greeted with applause by the U.S. team. Some on the Chinese side captured the moment with their Huawei smartphones and then leaked the photos to social media.
More substantively, China announced that it had approved imports of five new varieties of genetically modified crops, long sought by U.S. farmers and agribusinesses. The list of approvals included corn and soybeans produced by DowDuPont Inc., BASF, and Syngenta AG. China’s stock markets surged.
There were plenty of reasons for the two sides to negotiate seriously. An increase in tariffs on $200 billion of Chinese imports had been delayed after Presidents Xi and Trump dined at the Buenos Aires G-20 meeting. They were scheduled to rise to 25 percent on March 1, a level that was sure to harm Chinese exporters and their U.S. customers.
China’s economy was deteriorating faster than Chinese officials let on. Ning Jizhe, head of the National Bureau of Statistics (NBS) and also a deputy of China’s economic planning agency, called a meeting with some private-sector economists at the end of 2018 and asked them how the economy was faring. One by one, they sounded alarms about the manufacturing sector, which relied on exports. New orders were plunging and managers were cutting production and delaying decisions on investment and hiring. The financial sector was also shaky, they said.
Ning listened and then implied that the economists should help put a positive spin on the situation. “Very well,” he said. “We can all agree that we have confidence in the Chinese economy.”
Ning’s bureau also blocked the release of some statistics that showed weakness. In December, the NBS asked the southern province of Guangdong, the country’s export hub, to suspend publication of a monthly indicator of regional manufacturing activity. Guangdong had published the survey since 2011, but NBS now said the province lacked permission to continue.
“The purchasing managers’ survey conducted by the Guangdong Department of Industry and Information Technology was an illegal activity,” the NBS said in a statement.
U.S. companies were also starting to reel as the Chinese economy weakened. In January, Caterpillar Inc. set lower-than-expected profit targets for 2019, citing faltering demands for capital goods in China. A few months later, the company’s CEO, Jim Umpleby, told analysts that trade policy uncertainty had “put a certain amount of conservatism, I think, into all of our plans for capital spending.”
3M was also hit by a China slowdown. It lowered its profit outlook for 2019; about 10 percent of the industrial conglomerate’s sales come from China. Ditto with General Motors, which reported that its China sales in the fourth quarter of 2018 sank 25 percent. The automaker’s income from China fell to about $300 million from $500 million a year earlier.
Liu He and his delegation prepared carefully for their trip to Washington in late January, when Lighthizer was to cite Confucius. Of course, the Chinese approved five of Ivanka Trump’s trademarks before they arrived, as they regularly did before big meetings with the United States. These approvals covered wedding dresses and day care centers, among other things. China no longer touted Boeing aircraft sales, as they did in the Clinton years. By early 2020, the company hadn’t received a new order since October 2017, not long after the president announced the United States would go ahead with the Section 301 report. Airbus hadn’t received one either.
The Chinese negotiators planned to make a new foreign investment law, discussed in chapter 14, the centerpiece of their offer to the United States of a fairer deal for American companies. Liu had pushed hard to get the law ready for approval by China’s legislature in March. His efforts were applauded by U.S. business executives, but they still had plenty of criticism of the draft measure, which glossed over details and contained vague phrases that some companies thought could be used against them.
For example, a section describing the regulatory approvals needed for deals that could affect China’s national security was only a few sentences long. It said China wouldn’t expropriate foreign investment except under special circumstances “for the public interest”—a term that Chinese authorities could interpret to mean most anything.
The proposed law also envisioned setting up special economic zones to promote foreign investment, but didn’t provide a way for companies to expand nationally. That was a throwback to the Deng Xiaoping era of the 1980s, where economic experiments were limited to a few areas before they were promoted nationwide. Now, wary of a lack of meaningful reforms in Xi’s China, American officials figured the approach was aimed at delaying nationwide competition from foreigners.
Another worry: the law didn’t specify how it would be enforced at the local level. Without protection from arbitrary rulings, foreign firms could remain vulnerable to pressure to transfer technology. “Our concern is that the draft is so vague and high-level,” said Jacob Parker, then the Beijing-based vice president at the U.S.-China Business Council.
The draft law was hardly going to satisfy American negotiators, but for Liu it was a start. He had been able to quickly build consensus for the law within the Chinese bureaucracy. Perhaps he could also convince American negotiators that the new law could be used to address many of their concerns.
The two days of talks in Washington, January 30 and 31, didn’t produce any breakthroughs—and couldn’t have, given the embryonic stage of negotiations. For starters, the two sides hadn’t produced a written text to serve as the basis for negotiations. Rather, the discussions began a series of meetings where the two sides would try to narrow the gaps between them.
The Chinese pledged a big increase in purchases of U.S. farm and energy products, figuring that’s what President Trump wanted. They also listed plans China was devising to reduce the troubles faced by foreign investors and exporters. Then they pressed the United States to eliminate all the tariffs it had placed on Chinese goods.
The Americans responded by pushing for fundamental changes in the way China did business, including eliminating subsidies, reducing the role of state-owned businesses, and ending pressure on U.S. companies to hand over technology. (The Chinese still didn’t acknowledge that they tried to strong-arm foreign firms.) And the Americans insisted on the importance of tariffs as an enforcement tool.
Still, the two sides were talking, which was bound to encourage markets in both nations. The president—Wall Street Trump for the time being—was satisfied.
At 3:43 p.m. on January 31, Liu He was ushered into the Oval Office while TV cameras broadcast the encounter, a first for the envoy. Trump opened the session by asking a member of the Chinese delegation to read a letter Liu carried from Xi Jinping, in which the Chinese leader called for “an early agreement.” The letter explained why the Chinese side continued to focus on purchases despite Lighthizer’s harping on structural issues. “In our last phone call,” Xi wrote to Trump, “you said you wanted for China to buy more agricultural products. I have made some arrangements about which, I believe, you might have been briefed.”
The Chinese leader ended the letter with a flourish aimed directly at the president’s ego: “I feel we have known each other for a long time, ever since we first met,” he wrote. Trump told the assembled press: “That’s a beautiful letter.”
Trump then lavished praise on Xi’s envoy, calling Liu “one of the most respected men anywhere in the world,” and six times mentioned China’s pledge to buy more soybeans. Trump didn’t once utter the word “structural,” although attacking structural issues was the stated reason for the trade war. “That’s a tremendous purchase which will take place now,” Trump said of Liu’s pledge to buy millions of tons of soybeans. “And our farmers are going to be very happy.”
The next steps were up to the two leaders, Trump said. “I know that I’ll be meeting with President Xi, maybe once and maybe twice, and it’ll all seem—and it seems to be coming together.” After the journalists departed, Trump didn’t want to kill the feel-good buzz. The president asked everyone on his trade team to speak, except for trade hawk Peter Navarro, who was bound to raise objections. “We’re having a nice meeting,” the president said. “I don’t want to ruin it.”
For the Chinese, the meeting could hardly have gone better, aside from Trump’s announcement of an early summit with Xi, which Beijing hadn’t agreed to (and which never occurred). But for Lighthizer, Trump’s embrace of purchases and disregard of structural issues presented a big and continuing problem: How could he convince Chinese officials that they needed to make fundamental changes in China’s economy when his boss seemed uninterested in the issue and didn’t pressure Beijing to change?
In a White House press briefing after the Oval Office session, Lighthizer continued to focus on forced technology transfer, intellectual property, trade secrets, and the need for enforcement—all issues that Trump had skirted. As for whether Trump should meet with Xi before the March 1 deadline for tariffs to increase, Lighthizer was cautious. “If we don’t make headway between now and then,” Lighthizer said, “my advice would be that we can’t finish,” and Trump shouldn’t meet.
To amplify Lighthizer’s reservations, some Trump trade officials briefed Washington allies that there had been little progress on structural issues, figuring their concerns would reach the press.
On the business side, Myron Brilliant, the U.S. Chamber of Commerce’s executive vice president, spread the word. The two sides continued to differ on structural issues, he told the press later in the day, and any deal was a long way off. On the China-skeptic side, Hudson Institute’s Michael Pillsbury chimed in. “Based on the Chinese cockiness that they have Mr. Trump under control from donors, I’m afraid this is Mission Impossible,” he said at the time in an interview.
When outside commentators urged the United States to continue to hang tough and push China for fundamental reform, Lighthizer’s staffers called to thank them, even if those doing the talking were Democrats critical of the administration. “Message management,” a negotiator called it.
* * *
Over the following three months, U.S. and Chinese negotiators took turns crossing the Pacific and batting proposals back and forth, in a kind of ping-pong diplomacy. To start, the U.S. trade representative’s office produced a text out of the 142 items China indicated it might negotiate. U.S. officials labeled the items green, yellow, or red, depending on whether China said they were easy, difficult, or impossible to negotiate. Then they wrote text describing the issues to be negotiated, with brackets in the text marking where there was disagreement.
As in any negotiation, officials tried to reach agreement by reducing the number of bracketed items. In a show of good faith, the Chinese accepted the American text as a basis for negotiations.
Lighthizer set the negotiating agenda, often scheduling purchases as the last item to be discussed when the two sides met. That signaled yet again that structural issues and enforcement were the heart of the dispute to him, not soybeans or energy buys. Sometimes the negotiators ran out of time before they could talk about commodity purchases.
The United States and China spent months discussing increased Chinese purchases of American semiconductors. The area seemed to be a win for both nations. The United States was the global leader in semiconductors and China needed chips for electronics manufacturing. The Obama administration had killed a number of prospective Chinese purchases of U.S. chip makers. Why not encourage the Chinese now to buy more U.S. chips rather than build their own advanced semiconductor industry, American negotiators felt.
U.S. semiconductor exports averaged about $6 billion a year. In February, China’s top economic planning agency proposed quintupling U.S. semiconductor sales to China to $200 billion over six years. In March, Beijing scaled back the offer to only doubling chip purchases. In Washington, the Chinese embassy pitched the proposal to the industry’s trade association, the Semiconductor Industry Association (SIA). In China, the Ministry of Commerce and National Development and Reform Commission lobbied American semiconductor chip firms. On the U.S. side, the Commerce Department took the lead in lobbying for the deal.
But the chip industry rejected the overtures. The route American-made chips take to China is often circuitous. Semiconductors designed and manufactured in America are frequently tested and assembled into electronic components in low-wage countries like Mexico or Malaysia before being shipped to China. Those chips are counted as U.S. exports to the countries where the assembly takes place, not to China. To carry out the new purchasing proposal, U.S. firms would need to shift their assembly operations to China. Then the U.S.-produced chips would be shipped directly to China and be listed as U.S. exports to China.
The change wouldn’t mean additional sales, the industry argued. Rather, U.S. companies would have to rearrange their supply chain, at great expense, build more factories in China, and shutter others elsewhere. That would make them more dependent on Beijing, which someday could decide to cut off the U.S. companies. The United States shouldn’t encourage the Chinese government to take a bigger role in the semiconductor industry, industry officials said. “The Chinese must treat all U.S. companies impartially,” the SIA said in a statement emailed to the U.S. trade representative’s office in February.
American negotiators finally dropped the plan in March after Lighthizer talked with Sanjay Mehrotra, the CEO of memory chip maker Micron Technology. Lighthizer told Mehrotra that the president didn’t understand why the chip makers objected to more sales. “More sales are good, but we’d rather be out of it,” he told Lighthizer, explaining that the industry wanted sales based on fresh demand. After the call, the Washington representatives of the big chip firms discussed the issue by conference call and reaffirmed their opposition.
“Whatever the number, the Chinese chip purchase offer is a distraction that risks deepening Chinese state influence in an environment that is otherwise market-based,” said John Neuffer, the SIA’s president, after the industry discussions. “The market should determine commercial success, not government fiat.” Accepting defeat, a Trump administration official said Lighthizer “isn’t advocating for anything the industry doesn’t want.”
As negotiations continued, Liu and his team lobbied in Beijing to accelerate plans to further open China’s financial services and manufacturing sectors and to improve China’s protection of intellectual property rights. Those changes were in China’s interest, the leadership believed. Chinese negotiators also proposed having the central government monitor how local officials protect foreign patents and technology. Under the plan, American companies could report any coercion at the local level to regulators in Beijing, who would have the power to intervene.
China continued to dangle more purchases, including an order for 10 million metric tons of U.S.-grown soybeans—about one-third of what China bought from American farmers in 2017, before the trade war began. That would get Trump’s attention, the negotiators figured, because it would help buck up his rural political base.
But China would only carry out those purchases if the United States dropped its tariffs. “China is making all the concessions it can,” a Chinese official said. “The least the Americans can do is to cancel all the tariffs.”
Lighthizer wasn’t ready to move yet on tariffs. He was counting on them to enforce a deal. The two sides were planning to handle alleged violations of an accord through a series of consultations. If the disagreement couldn’t be resolved at a lower level, Lighthizer and Liu, or whoever replaced them in their positions, would consult.
If they couldn’t reach agreement, Lighthizer insisted, either side could levy tariffs for what it claimed was a violation of the accord. (That might sound even-handed, but only China was making pledges to change its economy and purchase more goods, so China would be the likely target for tariffs.)
Additionally, Lighthizer wanted China to agree not to retaliate if the United States reimposed tariffs. That was the only way to assure that enforcement wouldn’t lead to an endless cycle of retaliation that would undermine a deal, he argued. Ultimately, U.S. negotiators understood, Beijing could always scrap the deal if it felt the United States was being unfair. Still, Lighthizer’s terms were too much for Liu and the Chinese team. A no-retaliation clause would violate Chinese sovereignty, they argued. The issue remained unresolved.
“The American negotiators—they’re very, very tough,” said the Chinese official who complained about China having to make all the concessions.
Both sides had to worry about critics back home accusing them of weakness. On his left, Trump had to watch out for Democratic presidential candidates who looked for signs he was kowtowing. On his right, he had to placate anti-China warriors who feared he would settle too easily.
As always, he kept his eyes on Fox’s Lou Dobbs as a barometer of opinion on the right. On February 22, Dobbs attacked plans by the U.S. team to label any deal with China a memorandum of understanding—trade terminology for an enforceable agreement that doesn’t need congressional approval. Dobbs railed on his show that evening, incorrectly, that “an MOU isn’t worth the paper it’s written on. It is unenforceable.” The following day, during a televised Oval Office session with Liu He, Trump attacked Lighthizer for proposing an MOU.
“The real question is, Bob, do we do a memorandum of understanding, which, frankly you could do or not do,” Trump said. “I don’t care if you do it or not. To me, it doesn’t mean very much.” The president said he wanted a “final, binding contract.” After trying to explain what an MOU meant and getting nowhere with Trump, Lighthizer quickly conferred with Liu, as the cameras kept rolling. “We’ll never use the term again,” Lighthizer told the president, to laughter from the assembled press.
Later in the day, Lighthizer’s allies tried to make sure the controversy didn’t create a rift with the president, as had happened with so many other Trump advisers. They said Lighthizer regarded the presidential put-down as a simple misunderstanding. The trade representative remained in Trump’s good graces.
In Beijing, hard-line sentiment was growing against the Trump administration. It was buoyed by Washington’s campaign to thwart Huawei Technologies, whose commercial successes aroused enormous pride among ordinary Chinese. The Communist government had long portrayed China as a victim of years of humiliation at the hands of Western forces. Here was Beijing once again being threatened, this time by the United States—even though China had benefited greatly from its ties to the West.
Xi sought to appear unyielding. A few days before Liu left for his late February negotiating session in Washington, Xi’s office approved publication of a speech the leader made six months earlier, in August 2018. Xi vowed to stay the course on China’s political and legal systems. Releasing the speech then was meant to signal that Xi would resist any demands for China to, say, make judges more independent of the party so they could better enforce foreign intellectual property rights.
“We must never follow the Western path of constitutionalism, separation of powers, and judicial independence,” Xi said in the speech, published by the Communist Party’s influential journal Qiushi, or Seeking Truth.
“There is a growing call for a harder-line approach [toward the United States] in the Chinese society,” said Mei Xinyu, an analyst at a think tank affiliated with China’s Commerce Ministry. “The U.S. side should take such sentiment into account and shouldn’t be too greedy.”
The late February negotiations were so intense that officials on both sides didn’t take lunch breaks and ordered takeout instead. Liu went all-American by ordering a hamburger; Lighthizer chose Chinese eggplant and chicken. By the time of the Friday, February 22 Oval office session with Liu, where Lighthizer got chewed out for proposing an MOU, Trump said he had seen sufficient progress in the negotiations to delay indefinitely the March 1 deadline for raising tariffs to 25 percent. One big win, American negotiators said, was a deal with China on how Beijing would handle currency interventions.
“We actually concluded and reached an agreement—one of the strongest agreements ever on currency,” Treasury Secretary Mnuchin told the president.
“Have you discussed and reached a final agreement on currency?” Trump asked, making sure the press couldn’t miss the news.
“We have on currency,” Lighthizer confirmed. “But we have a lot more work to do over the next two days” as the talks extended into the weekend.
A few days later, in congressional testimony, Lighthizer said the deal involved pledges by China not to engage in competitive devaluations—meaning Beijing wouldn’t intervene in markets to drive down the value of the yuan to help its exporters—and to disclose when it intervened.
But the two negotiators were hyping the progress. The Chinese never fully agreed to a currency arrangement. The issue would continue to be a sticking point in negotiations many months later.
Negotiations were going so well, said the president, that he was looking forward to a summit with President Xi, where they could wrap things up. “Probably Mar-a-Lago. Probably fairly soon, during the month of March,” Trump said.
“We’re planning it with your schedule, Mr. President,” replied Mnuchin.
Liu He hadn’t said anything about a summit before Trump spoke and didn’t respond to Trump’s statement. Some on the Chinese side were miffed by the presumption that a U.S. leader could decide on his own when and where a Chinese leader would meet. Still, they were pleased with the overall progress.
After journalists left the room, Trump took pictures with the Chinese delegation and told the Chinese officials that they could pick whatever picture they wanted and he would sign each of them. Lighthizer commented that he hadn’t received any pictures of him with President Xi during earlier meetings. Not to worry, said Liu He, he would have the photos delivered to the U.S. team.
“Make sure to send some photos to John Bolton, too,” the president joked about his hawkish national security advisor. “He’s the one who’s trying to destroy Russia and China.”
* * *
At the beginning of March, China opened an eleven-day session of the largely ceremonial National People’s Congress. Xi used the meeting, traditionally a chance for the leadership to celebrate China’s growth prospects, to lay the groundwork for a potential deal with Washington.
Beijing signaled it had dropped, at least on paper, its “Made in China 2025” plan to put China at the forefront of global technology, which had spooked foreign competitors. During a nearly one-hundred-minute speech to the three thousand delegates inside the cavernous Great Hall of the People, Premier Li Keqiang didn’t make any reference to the plan, which he had highlighted the prior three years.
That didn’t mean that Beijing had forsworn using subsidies and other tools to help build Chinese technology, even if those policies would continue to discriminate against foreign firms. Li said the government would keep nurturing emerging industries, including advanced manufacturing, next-generation information technology, biomedicine, and electric automobiles. These were the same industries targeted by the Made in China plan.
To the Trump team, the wordplay meant that China was involved in a charade. But to the Chinese, the omission was significant. Not mentioning a plan that had been embraced by Xi Jinping was an indication Beijing was considering changes in its industrial policies. The Made in China plan had critics within the Chinese government, too, because it had led to waste and financial losses. For instance, cheap government-directed loans to battery makers had led to severe overproduction in the past few years.
Then the legislature made additional changes to the Foreign Investment Law as described earlier.
While Chinese officials pushed to make progress on a pact, they resisted American efforts to schedule a summit between the two leaders. They continued to fear that a meeting could be a disaster, given Trump’s unpredictability and willingness to tweet his version of reality, even if that wasn’t what the two sides agreed to. While the Buenos Aires meeting between the two leaders had gone well, Xi’s advisers worried about another encounter.
When Trump abruptly broke off nuclear disarmament talks in Hanoi with North Korean leader Kim Jong Un at the end of February, officials in the Zhongnanhai were further unnerved. What if Trump threatened to walk out of a meeting with Xi Jinping unless the Chinese accepted a take-it-or-leave-it proposition? The stakes were too high for Beijing to risk such a scenario. As March slipped away with no firm date for a meeting, U.S. officials started to say the meeting could be delayed until April. Although the two sides continued to talk about a meeting, it was never scheduled.
Still, U.S. officials became convinced that a deal was near. The two sides continued to meet, including nearly daily videoconferences, and reduced the number of bracketed items in the text. The U.S. side also believed the Chinese economy was weakening rapidly, in large part because of the tariffs. “We have hurt them,” White House economic adviser Kudlow claimed on CNBC on March 8. “We have them over a barrel.”
Trump felt he needed a deal to buck up the economy and his chances of reelection. If the two sides agreed soon on agriculture and energy purchases, the impact would start to be felt in the early part of 2020, when the election campaign was heating up. To encourage a deal, the United States signaled it would back off on some demands that would require China to remake its economy, including a reduced role for state-owned companies and diminished use of subsidies. “We’ve got to be realistic that this is a one-party authoritarian system. We don’t see that changing,” the U.S. ambassador to Beijing, Terry Branstad, told the Wall Street Journal in March.2
In a mid-March radio interview, Trump’s former chief White House economic adviser, Gary Cohn, was blunt: “I think the U.S. is desperate right now for an agreement,” he said. “The president needs a win. The only big open issue right now that he could claim as a big win—that he’d hope would have a big impact on the stock market—would be a Chinese resolution.”3
U.S. officials took turns expressing optimism about finishing a deal soon. On March 12, Lighthizer told the Senate Finance Committee, “Our hope is we are in the final weeks of an agreement.” On April 4, Trump forecast a deal “within the next four weeks, maybe less, maybe more.” On April 29, less than a week before the Chinese backed away from a deal, Mnuchin said the talks were in the “final laps.”
It’s clear now that the United States was misreading Beijing. What did Trump and company miss? From Xi’s perspective, the price of a deal was getting too expensive, politically and economically.
Even as China was beginning to balk, Lighthizer pushed for additional Chinese concessions, especially in high-technology fields the Chinese viewed as off-limits politically. He focused on China’s restrictions on U.S. providers of cloud computing and on the flow of data across its borders.
China was one of the world’s largest and fastest-growing markets for cloud computer services, which enable customers to store data, computing, and networking resources over the Internet, rather than on on-site computer servers. Alibaba Group Holding Ltd. and other domestic firms dominate the Chinese market, while foreign firms such as Microsoft and Amazon face severe restrictions.
Foreign cloud providers generally have to form joint ventures with Chinese partners, though foreign ownership of cloud firms is capped at 50 percent. In some areas such as data storage for Chinese customers, foreigners are barred outright. They usually end up licensing their technology to Chinese firms. A stringent cybersecurity law also requires cloud providers to store data in China and not move servers overseas.
For Americans, the cloud restrictions seemed deeply unfair. Chinese cloud computing companies faced no similar restrictions in the United States; they operated under the same rules as American companies.
But for the Chinese, cloud computing was a national security issue. The authoritarian government balked at changes that could loosen restrictions on the flow of data and information across borders. Ultimately, that could lead to breaches in the Great Firewall of China, they feared, and give ordinary Chinese access to information the party wanted restricted. Beijing was willing to give some ground for the sake of a deal, but not much.
On March 25, Premier Li met with about three dozen foreign CEOs attending an economic forum in Beijing. They included the heads of IBM, BMW, Daimler, Pfizer Inc., and Rio Tinto PLC, who got a chance to raise issues with the premier, though their questions were vetted by Li’s office beforehand.
IBM chief executive Ginni Rometty asked whether China would start to liberalize the cloud sector. She had reason to expect a positive response. A few days earlier, Lighthizer had hinted to IBM executives that Beijing might be willing to move. He and Mnuchin were about to fly to China for another round of talks, starting March 29, and the Chinese side might want to use the premier’s meeting to send a positive message.
Li said China was considering a “liberalization pilot” in one of a handful of free-trade zones in Shanghai and elsewhere around the nation. There, foreign cloud providers could own data centers in a confined area, so long as they provided “privacy protection,” Li said, without defining what that term meant. He didn’t offer any additional details.
The American response essentially amounted to: Huh? How would that work? How could China allow free flow of data from the operations in a small free-trade zone, but keep it separate from the rest of the country? What kind of data services could foreign firms provide in the zone? What customers could buy their services?
Even more galling, Li’s proposal wasn’t new. The Chinese government had floated that idea to IBM and other big U.S. tech firms as far back as 2012, but nothing had happened since. Lighthizer reported to colleagues that the offer was “half-assed.”
After additional tussling, China sweetened its cloud offer during talks in Washington in early April. Liu was willing to issue more of the licenses businesses need to operate data centers in China and to lift the 50 percent equity cap that limited ownership for some foreign cloud service providers. Lighthizer consulted with U.S. tech firms about the offer.
Still not enough, industry executives responded, given all the Chinese regulations hampering foreign participation in the sector. But it was as far as the Chinese were willing to go because of opposition within the party to any technology that could be used for political liberalization.
Lighthizer tried to push China on other issues, too. He resisted eliminating tariffs. He and Mnuchin asked China to double, or maybe even triple, its plans to buy $1.2 trillion in goods from the United States over the next few years.
To the United States, this was all part of continuing negotiations. To the Chinese, it was a wake-up call. Maybe a deal on American terms wasn’t worth it. What was in it for them?
On April 18, Vice Premier Hu Chunhua, who oversees foreign trade and investment and is a member of China’s Politburo, told a visiting Japanese trade delegation that he wasn’t sure the United States and China would reach a trade agreement anytime soon. “It’s up to the United States,” which was making demand after demand, Hu said.
Two weeks later, everything fell apart, as detailed in chapter 1.
Liu He hinted to Lighthizer and Mnuchin during their late April negotiating session in Beijing that his superiors weren’t on board with the text. On May 3, he sent a revised version of a part of the text to Washington, reflecting the views of the top leadership. The bulk of China’s concessions were crossed out and looked like “a sea of red,” U.S. officials said. The Americans were enraged and Trump wanted to immediately lash out.
The most Lighthizer could do was restrain him for two days, during which the trade representative tried to figure out how he and Mnuchin had misjudged Chinese politics so badly—not realizing that it was Xi Jinping himself who killed the plan. On Sunday, May 5, President Trump announced a jump in tariffs on the $200 billion in Chinese imports to 25 percent—which he had previously delayed indefinitely—and ordered levies on everything China sold to the United States. Not long afterward, the United States hit China’s most successful high-tech company, Huawei Technologies, with what seemed like a devastating blow. U.S. companies were ordered not to sell Huawei the semiconductors, software, and other components it needed unless they obtained a license that the Commerce Department rarely issued, although the ban didn’t go fully into effect immediately.
The trade war, which seemed to be easing, escalated instead. The schoolyard fight metaphor only reaches so far. Both sides prepared for a long struggle. A new Cold War was taking shape.