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China, U.S. Seek to Narrow Gap on Trade Ahead of a Summit -- Update

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02/12/2019 | 12:32pm EST

By Lingling Wei and Bob Davis

BEIJING -- Chinese and U.S. negotiators are focusing this week on producing a broad outline of a trade agreement for their presidents to clinch at a possible summit, according to people with knowledge of the matter.

Officials holding trade and economic portfolios for both governments are seeking to narrow the still-substantial gap between the concessions China is willing to offer and what the Trump administration will accept. Discussions between midlevel officials began on Monday in China's Commerce Ministry. Then, a high-level U.S. delegation led by Trade Representative Robert Lighthizer and Treasury Secretary Steven Mnuchin will hold two-day talks, starting Thursday, with Chinese Vice Premier Liu He and his entourage.

Both sides hope to hash out a framework of a deal, the people said, with the goal of getting it finalized in a meeting between President Trump and Chinese President Xi Jinping. The date for such a session hasn't been set. Mr. Trump last week appeared to rule out a meeting by the March 1 deadline for a deal -- after initially suggesting he was planning on meeting with the Chinese leader.

If the two sides don't agree by then or don't agree to extend the deadline, tariffs on $200 billion of Chinese goods will jump to 25% from 10% at 12:01 a.m., Saturday March 2.

Some of Mr. Trump's more hawkish advisers on trade have been warning him against a meeting, arguing that market expectations for a deal would reduce his leverage once a summit were scheduled. After Vice Premier Liu went to Washington for a round of talks at the end of January, Mr. Lighthizer warned that if the two sides didn't make further headway this month, he would advise Mr. Trump "that we can't finish" before March 1 -- suggesting tariffs would be hiked.

Since then, there has been signs that Mr. Trump is reconsidering again. "He wants to meet with President Xi very soon," White House senior counselor Kellyanne Conway told Fox News in an interview on Monday. "This president wants a deal."

Asked Tuesday morning about the prospects of a trade deal, Mr. Trump responded: "We'll see what happens," adding that he believed China wants to reach an agreement.

Beijing so far has remained reluctant to give ground on issues it sees as crucial to maintaining the Communist Party's rule. Those include eliminating government subsidies to state-owned companies and other policies that underpin its state-led economic model. Washington sees such steps as essential to level the playing field for American businesses operating in the world's second-largest economy.

When Mr. Liu was in Washington, Chinese officials talked of boosting Chinese purchases of U.S. farm and energy products and services, accelerating China's market-opening efforts in sectors such as financial services and manufacturing, and improving its protection of American intellectual-property rights, according to people briefed on the discussions. China's leadership sees all those measures as aligned with the nation's own interests.

Sharp divisions have remained on items such as how Beijing can address U.S.'s complaints that Chinese authorities and companies pressure U.S. companies to share technology, and what Washington calls Beijing's protectionist industrial policies that favor state-controlled companies at the expense of U.S. competitors.

Beijing denies that there is ever any official pressure on U.S. businesses to transfer technology. Instead, Chinese officials have said, foreign companies voluntarily share technology in exchange for access to China's markets. The issue of coerced technology transfer is a key reason that U.S. businesses' support for Beijing has waned in recent years, with major companies complaining of threats and pressure to turn over proprietary information and technology to Chinese partners.

In a recommendation to Mr. Lighthizer's office last year, the U.S.-China Business Council, a group representing more than 200 American businesses that do business with China, suggested a number of ways that Beijing could address such concerns. One was installing independent, transparent regulatory panels that wouldn't expose trade secrets provided by foreign companies as they say sometimes happens with the expert boards that currently review new products ahead of commercial production.

If both sides hammer out a broad framework of a deal this week, it would likely include the offers China is making but leave the thornier issues, such as China's industrial policies, for the presidents to work out, according to the people.

Another challenge that both sides face is how to ensure that Beijing follows through on its promises. U.S. officials, who have for years complained about China's poor follow-up record, are pushing for provisions that would either permit Washington to reimpose tariffs on Chinese goods should Beijing fail to meet certain milestones -- "snap-back" in trade lingo -- or leave the levies in place and gradually remove them if Beijing meets agreed-upon yardsticks.

Chinese negotiators have pushed back at both ideas, saying that these mechanisms would violate China's sovereign rights. Former U.S. negotiators say that snap-back enforcement might be more palatable to Beijing.

Wendy Cutler, a former Asia negotiator for the U.S. Trade Representative's office, said Korea agreed to such a provision in the U.S.-Korea Free Trade Agreement concerning automobiles. A snap-back deal would also be easier than leaving tariffs in place until Beijing hit certain benchmarks, she said, because questions of compliance usually aren't clear-cut and reimposing tariffs would be politically difficult for the U.S.

Both Washington and Beijing have economic incentives to prevent the tariff fight from getting worse. China's economy is slowing faster than officials expected, with more than half of the 31 provinces in the country failing to meet their growth targets last year. That's in part due to the 10% tariffs the U.S. imposed in September on half China's U.S.-bound exports, on top of 25% tariffs imposed on $50 billion in Chinese goods earlier in 2018.

Farmers and other types of businesses in the U.S., on the other hand, are also feeling the pinch from Beijing's retaliatory tariffs and China's economic slowdown. "The trade truce won't last unless both sides realize no one wins in a trade war," said Yu Yongding, a member of the Chinese Economists 50 Forum, a think tank that advises Chinese policy makers.

Write to Lingling Wei at lingling.wei@wsj.com and Bob Davis at bob.davis@wsj.com

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