MNI POLICY: US-China Phase 2 Deal Seen Unlikely This Year

--US-China Relations Committee's Dong Says Phase 1 Left Out Big Issues

By Greg Quinn

     SEATTLE (MNI) - China and the U.S. will struggle to pull together a

complete trade agreement this year, as the preliminary Phase One deal set to be

signed this month appears to have left out most of the tough issues, National

Committee on U.S.-China Relations Director Nelson Dong told MNI.

     The stumbling blocks are around things such as technology transfers,

subsidies and state-owned enterprises, Dong said in a phone interview on

Tuesday.

     "It will be very hard to get to a Phase Two agreement. They have mostly

kicked the can down the road in terms of the harder structural issues."

     "There is no indication even in the most optimistic and rosy summaries of

Phase One that the Chinese have really given a whole lot of ground in that

domain," said Dong, a senior partner at the Dorsey & Whitney law firm in

Seattle. The U.S.-China relations committee is a nonprofit established in 1966

whose members include Henry Kissinger and former Treasury Secretary Michael

Blumenthal.

     President Xi Jinping and others want to resist perceptions they are making

big concessions under U.S. pressure, he said. On the American side, while Donald

Trump's supporters will stick with him through just about any trade posture with

China during this year's presidential election, Congress is showing bipartisan

support for a harder line.

     While that means China has little incentive for stalling talks to see if

Trump loses, the chances for a fresh breakdown in trade talks are still

amplified by other issues. Those include the protests in Hong Kong, Taiwan's

Jan. 11 election and China's ties to Iran and its oil industry, he said.

     "There are any number of things that could pop and create a new flashpoint

in the relationship," he said. "The political season this year is going to be

very hard to predict on the international front," Dong said.

     A first-stage U.S.-China deal came just in time to avoid threatened Dec. 15

tariffs on $160 billion of imports, but beyond that the deal featured only a

minor tariff rollback, leaving duties on two-thirds of imports from China, worth

more than $350 billion. The risk of a global trade war led the IMF to slash

growth forecasts and was part of the reason the Fed led a wave of interest-rate

cuts last year.

     --TECH SECTOR

     The U.S. might also use other tools that irritate China, such as foreign

investment rules and export controls that blunt competition from tech companies

like ZTE and Huawei, Dong said.

     "There will still be deep concern and hostility around the tech sector," he

said.

     U.S. tech companies face a downside from trade policy if Chinese firms

decide to go it alone and build their own networks that become rivals to

American products. Chinese and U.S. companies may also skirt trade restrictions

by moving production to nearby nations or the North American free trade zone, he

said.

     China's reluctance to match Trump's frequent comments touting Phase One

reflects a different government that doesn't need to pump up popular support, he

said. Keen students of American politics, they also know that it could be

damaging to be drawn into a war of words with Trump.

     "They are probably seeing that the less they say, the better it is for them

in terms of acknowledging that China has had to give any ground at all," Dong

said.

--MNI Ottawa Bureau; +1 613-314-9647; email: greg.quinn@marketnews.com

--MNI London Bureau; +44 203 865 3829; email: jason.webb@marketnews.com

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