WASHINGTON/BEIJING — Despite being steps away from finalizing an agreement to end the trade war, negotiations between the U.S. and China have come to a screeching halt, largely over Chinese state subsidies to its core industries.
“The U.S. and China had agreed on over 90% of the trade pact,” an official at an American economic group said. “But they were ultimately unable to bridge their rift on Chinese subsidies.”
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.
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.
“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.”