China to ask US to lift tariffs in exchange for ag buys

Top US and Chinese trade officials will discuss plans on Friday for China to buy more US farm products, but in return, Beijing will request cancellation of some planned and existing U.S. tariffs on Chinese imports, people briefed on the talks told Reuters.

Robert Lighthizer, the United States Trade Representative, US Treasury Secretary Steven Mnuchin, and Chinese Vice Premier Liu He will speak by telephone Friday, their latest attempt to calm a nearly 16-month trade war that is roiling financial markets, disrupting supply chains and slowing global economic growth.

The two sides are working to try to agree on a text for a "Phase 1" trade agreement announced by US President Donald Trump on Oct. 11, in time for him to sign it with China's President Xi Jinping next month at a summit in Chile.

So far, Trump has only agreed to cancel an Oct. 15 increase in tariffs on $250 billion in Chinese goods as part of understandings reached on agricultural purchases, increased access to China's financial services markets, improved protections for intellectual property rights and a currency pact.

But to seal the deal, Beijing is expected to ask Washington to drop its plan to impose tariffs on $156 billion worth of Chinese goods, including cell phones, laptop computers and toys, on Dec. 15, two U.S.-based sources told Reuters.

Beijing also is likely to seek removal of 15% tariffs imposed on Sept. 1 on about $125 billion of Chinese goods, one of the sources said. Trump imposed the tariffs in August after a failed round of talks, effectively setting up punitive duties on nearly all of the $550 billion in U.S. imports from China.

"The Chinese want to get back to tariffs on just the original $250 billion in goods," the source said.

Derek Scissors, a resident scholar and China expert at the American Enterprise Institute in Washington, said the original goal of the early October talks was to finalize a text on intellectual property, agriculture and market access to pave the way for a postponement of the Dec. 15 tariffs.

"It's odd that (the president) was so upbeat with Liu He and yet we still don't have the December 15 tariffs taken off the table," Scissors said.

US Treasury Secretary Steven Mnuchin said last week said no decisions were made about the December 15 tariffs, but added: "We'll address that as we continue to have conversations."

SMALLER PURCHASES?

If a text can be sealed, Beijing in return would exempt some US agricultural products from tariffs, including soybeans and wheat and corn, a China-based source told Reuters. Buyers would be exempt from extra tariffs for future buying and get returns for tariffs they already paid in previous purchases of the products on the list.

But the ultimate amounts of China's purchases are uncertain.

Trump has touted purchases of $40-50 billion annually -- far above China's 2017 purchases of $19.5 billion as measured by the American Farm Bureau.

One of the sources briefed on the talks said that China's offer would start out at around $20 billion in annual purchases, largely restoring the pre-trade-war status quo, but this could rise over time. Purchases also would depend on market conditions and pricing.

Lighthizer has emphasized China's agreement to remove some restrictions on US genetically modified crops and other food safety barriers, which the sources said is significant because it could pave the way for much higher U.S. farm exports to China.

The high-level call comes a day after US Vice President Mike Pence railed against China's trade practices and construction of a "surveillance state" in a major policy speech. But Pence left the door open to a trade deal with China, saying Trump wanted a "constructive" relationship with China.

While the U.S. tariffs on Chinese goods has brought China to the negotiating table to address US grievances over its trade practices and intellectual property practices, they have so far failed to lead to significant change in China's state-led economic model.

The "Phase 1" deal will ease tensions and provide some market stability, but is expected to do little to deal with core US complaints about Chinese theft and forced transfer of American intellectual property and technology. The intellectual property rights chapter in the agreement largely deals with copyright and trademark issues and pledges to curb technology transfers that Beijing has already put into a new investment law, people familiar with the discussions said.

More difficult issues, including data restrictions, China's cybersecurity regulations and industrial subsidies will be left for later phases of talks, but some China trade watchers said that a completion of a Phase 1 deal could leave little incentive for China to negotiate further, especially in a U.S. election year in 2020.

"US-China talks change very quickly from hot to cold but, the longer it takes to nail down the easy phase 1, the harder it is to imagine a phase 2 breakthrough," said Scissors.

Two of the sources said that Mnuchin and Lighthizer would likely travel to Beijing the week of Nov. 3 for further in-person talks to try to finalize a text. But a Treasury spokesman said no such meeting had been planned.