WASHINGTON/BEIJING (Reuters) – The diplomatic cable from Beijing arrived in Washington late on Friday night, May 3, with systematic edits to a nearly 150-page draft trade agreement that would blow up months of negotiations between the world’s two largest economies, according to three U.S. government sources and three private sector sources briefed on the talks.
The document was riddled with reversals by China that undermined core U.S. demands, the sources told Reuters.
In each of the seven chapters of the draft trade deal, China had deleted its commitments to change laws to resolve core complaints that caused the United States to launch a trade war: Theft of U.S. intellectual property and trade secrets; forced technology transfers; competition policy; access to financial services; and currency manipulation.
The U.S. pushed China to scrap all subsidies that violate World Trade Organization rules, and China agreed to cutbacks in negotiations in a sign of compromise. But China began to look for loopholes at the last minute, such as by hesitating to curb regional government subsidies, the economic group official said.
USTR Robert Lighthizer expressed concern over the issue as early as a week before Trump’s Sunday tweet vowing to raise tariffs, sources say. The U.S. thought they had agreed to include language on reforming Chinese subsidies as part of their pact. But China is believed to have reneged, wanting instead to address the issue without writing it into the deal.
“We have seen an erosion in commitments by China” over the last week or so, Lighthizer said on Monday. He is believed to have pushed Trump to take a tougher stance on China.
Subsidies form the foundation of China’s version of capitalism, where provinces compete with each other to lure industry to boost tax revenue and employment. The U.S. considers low-interest loans from state-owned banks a type of state subsidy, but Xi is reluctant to make changes that would deeply affect financial institutions and regional businesses.
There is also speculation that Vice Premier Liu He, Beijing’s chief negotiator, faced pushback when he presented the final draft of the trade deal to the Communist Party’s 25-member Politburo. He did not communicate up to political leaders during the negotiations.
“It seems that until recently there was no Chinese text of the trade deal draft and the discussions were based on the English text and verbal discussions,” said Dennis Wilder, a former China analyst for the CIA. “At the end of the process, the Chinese text had to be circulated among the Politburo and my feeling is that comments were raised there.”