U.S., China to relaunch talks with little changed since deal fell apart

By David Lawder and Chris Prentice

WASHINGTON/NEW YORK (Reuters) - The United States and China are set to relaunch trade talks this week after a two-month hiatus, but a year after their trade war began there is little sign their differences have narrowed.

After meeting with Chinese President Xi Jinping in Japan just in late June, U.S. President Donald Trump agreed to suspend a new round of tariffs on $300 billion worth of imported Chinese consumer goods while the two sides resumed negotiations.

Trump said then that China would restart large purchases of U.S. agricultural commodities, and the United States would ease some export restrictions on Chinese telecom equipment giant Huawei Technologies.

But sources familiar with the talks and China trade watchers in Washington say the summit did little to clear the path for top negotiators to resolve an impasse that caused trade deal talks to break down in early May.

White House economic adviser Larry Kudlow said Washington was still waiting for China to make good on what he called a "very, very important" pledge to quickly buy more agricultural products, but said there was no firm deadline for such purchases, or for finalizing an overall deal.

Kudlow underscored the divergent perspectives of the world's two largest economies. He said the United States was seeking remedies and correctives for what it sees as decades of unfair and illegal trading practices, but that would necessarily clash with China's push for a fair and equitable agreement.

Those differences could still be overcome in negotiations, Kudlow, director of the White House's National Economic Council, told an event hosted by CNBC, adding, "It's not impossible. Where there's a will, there's a way."

U.S. Trade Representative Robert Lighthizer, Chinese Vice Premier Liu He and Treasury Secretary Steven Mnuchin are due to resume talks by phone this week.

Kudlow told reporters the two teams would meet in person in the near future.

The United States is demanding that China make sweeping policy changes to better protect American intellectual property, end the forced transfer and theft of trade secrets and curb massive state industrial subsidies. At stake, U.S. officials say, is dominance of the high-tech industries of the future, from artificial intelligence to aerospace.

"We've had a change in atmospherics," said Derek Scissors, a China expert at the American Enterprise Institute, a business-oriented Washington think tank. "While this is great for markets, the administration has not said one specific thing about how we're unstuck."

Scissors, who has at times consulted with Trump administration officials, said that both sides got what they wanted out of the summit -- a lowering of the temperature and the avoidance of new tariffs that would have been painful for both sides.

"The pressure for one side to give into the other is diffused right now. I expect this to drag out for months," Scissors added.

NO FIRM COMMITMENTS

Washington and Beijing appear to have different ideas of what the two leaders agreed in Osaka.

Three sources familiar with the state of negotiations say that the Chinese side did not make firm commitments to immediately purchase agricultural commodities.

One of the sources said Trump raised the issue of agricultural purchases twice during the meeting, but Xi only agreed to consider purchases in the context of a broader final agreement.

Other than a small purchase of American rice by a private Chinese firm, no purchases have materialized. Chinese officials and state media accounts in the past week have emphasized that any deal, including agricultural purchases, is dependent on removal of U.S. tariffs.

"The Chinese have been clear they didn't promise anything," said one source familiar with the talks.

"The idea they would give up their main leverage before getting anything doesn’t make sense. I could see them buying some pork and buying some soybeans, but it's still going to be pennies."

Trump administration officials have also downplayed the extent of pledges to allow Huawei to purchase U.S. technology products, with White House trade adviser Peter Navarro saying that only "lower-tech" U.S. semiconductors could be made available for sale to the company..

Reuters reported last week that the Commerce Department's export control enforcement staff was told to continue to treat Huawei as a blacklisted entity as the department considers requests for licenses to U.S. firms to sell products and services to Huawei

And Kudlow told the CNBC event that the relaxed rules on sale to Huawei would only be in effect for a limited time.

Chinese officials point out that they only got the United States to concede on Huawei at the Osaka talks, rather than on their other demand, which was removing the existing tariffs.

So the focus on the upcoming talks will be the scrapping on the tariffs, they say.

A second source said that U.S. tariffs on $250 billion worth of Chinese goods and Chinese tariffs on $160 billion worth of U.S. goods could wind up being "the new normal."

One Chinese official familiar with the situation said trade talks would be re-started very quickly, but that there was a "fairly large gap" in the core demands of both countries and it would be a challenge to reach consensus on the toughest issues.

"The negotiating environment is even more severe," the official said.

Another official said China remained concerned about the presence of hawks in the U.S. team, such as Trump advisor Peter Navarro.

"There are bullies there," the official said.

The officials spoke to Reuters on condition of anonymity.

China's foreign ministry cited Xi as telling Trump at Osaka that "on issues concerning China's sovereignty and dignity, China must safeguard its core interests".

WHICH TEXT?

There has been no indication the two sides will resume negotiations using a text that had been largely agreed before China backtracked on commitments in early May, prompting Trump to proceed with a long-threatened tariff hike to 25 percent on a $200 billion list of Chinese imports.

Beijing had cut out of that text commitments to make changes to its laws reflecting reform pledges, arguing that this would violate its national sovereignty.

Finding a way around this issue is paramount for talks. Beyond that, there are many other difficult issues to resolve, including the structure of an enforcement mechanism designed to hold the two sides to their pledges.

U.S. demands for curbs to provincial and local subsidies for Chinese state companies, access to China's cloud computing market, agricultural biotech approvals and the scope of China's agricultural purchases remain divisive issues for the two sides.

Claire Reade, a former China trade negotiator at USTR who is now a Washington-based trade lawyer with the firm Arnold and Porter, said there was room on both sides to get a deal.

"There are ways to maneuver around the current red flags that have been put in the ground," Reade said. "Both President Xi and President Trump have to come out of this saying they stood strong, and they in-effect got a win."

One way for China to avoid the appearance of giving in to U.S. demands is to take some legal steps on key issues before the deal is agreed. That way they can say they’re doing it on their own terms, she added.

(Additional reporting by Ben Blanchard in Beijing and Andrea Shalal in Washington; Editing by Simon Webb and Alistair Bell)