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Xi Jinping thought time was on his side in his battle with Donald Trump, but a poor economy proved him wrong. Nikkei montage/Source photos by Reuters
China up close

Did Xi surrender to Trump? China struggles to silence chatter

Trade deal contains many concessions by Beijing like import targets

KATSUJI NAKAZAWA, Nikkei senior staff writer | China

TOKYO -- When the U.S. and China reached a "phase one" trade deal late last week, neither Saturday's prime time news program on state-run China Central Television nor the Sunday edition of the People's Daily spoke a word of it, despite the media fanfare that hit much of the rest of the globe.

Almost no official commentaries about the trade deal have been made since then.

Nevertheless, a quiet debate is taking place among Chinese political junkies, be they intellectuals or ordinary citizens. Most of these whispered conversations happen face-to-face, since online posts are under strict surveillance, now with the help of artificial intelligence.

"Did Chinese President Xi Jinping just surrender to U.S. President Donald Trump?"

"The U.S. can unilaterally monitor and assess the progress of the agreement. Furthermore, China also appears to have made numerical pledges on expanding imports from the U.S. by $200 billion over the next two years."

"After wasting more than six months, is this the result we ended up with?"

Those are some of the thoughts and questions being exchanged.

The buzzword being used for "surrender" is cheng xia zhi meng, literally "an oath taken at the bottom of the castle." It refers to a peace treaty a city is forced to conclude after seeing enemy forces breaching its last castle wall.

The origin of the term dates back to around 700 B.C., when troops of Chu, a state of the Spring and Autumn period, defeated the besieged troops of an enemy state.

The 1842 Treaty of Nanking was also an example of cheng xia zhi meng. It called on the Qing Dynasty to cede Hong Kong Island to the British and open several ports, including Shanghai, to foreign trade.

Portraying the trade deal as humiliating and treacherous may be a little too harsh.

But Xi and his team had always held that if China were to fight a protracted war with the U.S., it would be able to gain the upper hand.

For that reason alone, it was a risk for the Chinese leadership to quickly announce the content of the agreement with Washington. Sweeping inconvenient truths under the carpet is reminiscent of the Japanese Imperial Army during World War II.

Here are the chain of events that took place last week.

The trade deal was announced simultaneously by the U.S. and China mere days before additional U.S. punitive tariffs on Chinese products were set to kick in, on Sunday.

In Beijing, vice ministers of relevant government divisions held a late Friday night news conference. Chinese media reported the outline of the deal as breaking news.

But the story was omitted from the People's Daily and CCTV's prime news, China's most authoritative newspaper and television network, the following day.

No cabinet ministers attached to the commerce or agricultural ministries nor from the powerful National Development and Reform Commission were present at the news conference. Neither was Vice Premier Liu He, China's lead negotiator.

Instead, the announcement was left to bureaucrats, although the event would have provided a golden opportunity for politicians who might have been keen to show off their achievements.

At the end of April, the U.S. and China had compiled a 150-page draft trade deal. But by early May China abruptly abandoned 30% of the text, in effect scrapping the draft.

China did not want an unequal treaty. But as a result of rejecting the agreement, Trump announced the third and fourth rounds of punitive tariffs on Chinese products.

According to a fact sheet released by Washington, the phase one deal reached last week covers seven areas: intellectual property protections, ending forced technology transfers, expanding imports of U.S. food and farm products, deregulating financial services, addressing "unfair" currency practices, expanding trade, and setting up a dispute settlement mechanism.

The agreement will be legally binding, which requires the National People's Congress, China's parliament, to give its approval.

By incorporating a scheme for the U.S. to monitor, measure and assess China's progress in meeting the agreement's stipulations, it ended up being precisely the kind of "unequal treaty" that Beijing so wanted to avoid in April.

The deal includes numerical targets: China is supposed to boost imports from the U.S. by $200 billion over the next two years, with the aim of shrinking the bilateral trade imbalance.

The agreement also calls for farm imports from the U.S. to be expanded by $40 billion to $50 billion a year.

Trump is proud of the achievement. Although China has explained that the volume of imports is something to be determined by market forces, it has indeed accepted sector-by-sector numerical targets.

For Xi, who was on his back foot in the trade war due to China's struggling economy, the best he could do was to protect the fundamental structures that enable the authoritarian communist regime to rule.

Trump had pressed China to abolish "unfair" industrial subsidies. The American president has been calling for China to drastically reform its state-owned companies and switch its focus to private companies.

Xi managed to punt these tricky issues to phase two of the negotiations.

In retrospect, China perhaps would have had a better deal if it had compromised in April.

Although that too would have been an unequal treaty, China could have circumvented the additional tariffs and perhaps kept economic growth from falling to 6% in the July-September quarter, the country's slowest pace of expansion since 1992.

Instead, China shifted its strategy and began to pursue a policy of "self reliance" and "protracted war."

Chinese officials seem to have decided at the time that the U.S. presidential election cycle, which is already kicking into gear, would tip the balance in their favor. They likely thought they could have easily dealt with Trump by using farm imports as a bargaining chip. Beijing knows that Trump's reelection bid could hinge on voters in traditional farm states.

But contrary to their expectations, the passage of time worked in Trump's favor. Since April, China's economy has slowed more sharply than Beijing can accept. Thinking Trump could be won over with pledges of additional farm imports was a significant error in judgment.

As it turned out, Xi had no choice but to come to terms with Trump.

"This year's tax collection will be challenging," said a Chinese source involved in economic affairs. "I wonder if negative growth can be avoided? As things stand now, there are no funds left for economic stimulus packages, such as large-scale tax cuts."

The only concession China gained in the phase one deal is the deferment of the remaining tariffs in the fourth round and a halving of the 15% additional tariffs already levied in the fourth round, in September.

Furthermore, the halving of tariffs will only be implemented 30 days after the phase one deal is formally signed, meaning that the tariff reduction will not come until February at the earliest, and its size will be small.

Everything else in the deal was China meeting U.S. demands.

U.S. Trade Representative Robert Lighthizer, the lead American negotiator, said in a TV interview that the success of the latest trade deal will depend on whether reformers or hard-liners end up making the decisions in Beijing.

He thus expressed hope that the agreement will be implemented steadily, under the leadership of reformers.

It remains unclear when second phase negotiations will kick off, although Trump has said "immediately."

Industrial subsidies and reform of state-owned companies are fundamental issues in socialist China, but ones with vested interests in their corner.

The fact that reform of state-owned companies and industrial subsidies are the only issues that have been excluded from the phase one deal shows how desperate Beijing is to protect the vested interests.

Shifting from a state-led economy to one that is driven by the private sector is a transformation not only dreamed of by China's small and medium-size companies, but also a change the rest of the world awaits.

The Chinese Communist Party's 19th Central Committee came down on the side of state-owned companies during its fourth plenary session at the end of October.

It is a shift that would benefit most Chinese people, just not those with vested interests in the party.

But it goes directly against what Xi has been pursuing and would threaten his power structure.

At the fourth plenary session of the party's 19th Central Committee at the end of October, members decided to strengthen the party's comprehensive rule while attaching importance to state-owned companies.

Any move to abolish industrial subsidies and reform state-owned companies would be in conflict with Xi's new era.

With a party power struggle continuing over economic policies, and with conservatives still alive and kicking as a mainstream faction, the second phase of U.S.-China negotiations promises to be an uphill climb. An agreement could very well be delayed until after next year's U.S. presidential election, in November.

Xi should have little trust in Trump's stance. If the phase one deal were to be attacked by Democrats as a failure and the president's Republican Party to suffer opinion poll setbacks, Trump could easily flip-flop and revert to tariffs to press China to abolish industrial subsidies and reform state-owned companies.

A host of other issues affects U.S.-China relations, including the unrest in Hong Kong, alleged violations of Uighur Muslims' human rights in Xinjiang and Taiwan's presidential election on Jan. 11.

2019 has been very difficult for Xi. With less than two years left until the party's next national congress, the Chinese leader is looking at some arduous months ahead.

Katsuji Nakazawa is a Tokyo-based senior staff writer and editorial writer at Nikkei. He has spent seven years in China as a correspondent and later as China bureau chief. He is the 2014 recipient of the Vaughn-Ueda International Journalist prize for international reporting.

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