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Trade War

US and China to test 'art of the deal' over trade

Trump's ZTE U-turn is likely to ease talks, but steep hurdles remain

Chinese President Xi Jinping, left, and U.S. counterpart Donald Trump met in China in November. Both countries have been competing fiercely on advanced technology.   © Reuters

WASHINGTON -- The U.S. and China are expected to mix charm and threats as they search for common ground in their second round of trade talks, with Chinese smartphone maker ZTE serving as a geopolitical pawn.

The talks are set to begin here amid much speculation about the fate of ZTE, which was hit by U.S. sanctions last month banning it from buying American technology for seven years.

The harsh punishment sent shock waves through Beijing as the electronics maker teetered on the brink of collapse. Then President Donald Trump abruptly shifted course on Sunday, tweeting that he and Chinese counterpart Xi Jinping were working together to give ZTE "a way to get back into business, fast." 

The next day, Commerce Secretary Wilbur Ross told reporters the U.S. will be "very, very promptly" looking into "alternative remedies" on the matter. 

Some see Trump's about-face as a signal that both sides are moving toward a compromise.

China has been "making hundreds of billions of dollars a year from the U.S., for many years," Trump tweeted Tuesday -- the day Vice Premier Liu He, a close aide to Xi, arrived in Washington for trade talks. Trump urged people to "stay tuned" for progress from the talks. Initial negotiations in Beijing earlier this month left both sides far apart.

Tensions flared between the world's two largest economies in March when Trump imposed additional tariffs on about $50 billion worth of Chinese imports in retaliation for alleged unfair trade practices. In talks May 3 and 4, U.S. Treasury Secretary Steven Mnuchin's team made a stern demand that the $375 billion U.S. trade deficit with China be narrowed by $200 billion in two years. It also asked China to bring down its tariffs to levels in line with the U.S. by 2020. 

According to U.S. and Chinese diplomatic sources, Liu's schedule includes a meeting Wednesday with 94-year-old Henry Kissinger, who as top adviser to President Richard Nixon opened American relations with mainland China in the early 1970s. Trade matters will be handled mostly on Thursday and Friday in meetings with Mnuchin and other officials.

The easing of tensions over the North Korean situation, a top priority for Trump, likely spurred movements in U.S.-China trade relations. The U.S. president is set for a historic summit with Northern leader Kim Jong Un in Singapore on June 12. Shortly after Kim met Xi recently in Dalian, China, their second meeting in two months, Xi called Trump and offered to mediate in the process of denuclearizing the North.

Xi is also believed to have asked Trump to ease up on ZTE during that conversation. The partly state-owned company, which last year was the world's No. 9 smartphone maker by global shipments, froze Chinese smartphone sales after losing access to semiconductors and other key American parts. U.S. authorities may also penalize ZTE's larger rival Huawei Technologies over similar charges. The Xi administration, which is gearing up for long-term rule, was wary of the instability that could follow if those two major tech companies were crippled.

Beijing appears to be trying both hard- and softball approaches in seeking leniency on ZTE. Last week, it sent government officials in advance of trade talks to outline plans to open China's markets for American automobiles and agricultural products, as well as to strike retaliatory tariffs on pork and other agricultural goods, according to a diplomatic source. Huawei executives also reportedly traveled to Washington and told U.S. justice officials the company would sue if sanctioned.

But many in the U.S. oppose dropping the ZTE sanction, which had been in the works since the previous administration. The ban was "an enforcement action, separate from trade," Commerce Secretary Wilbur Ross said Monday. Sen. Marco Rubio, of Trump's own Republican Party, tweeted Monday that Chinese telecoms "can be forced to act as [a] tool of Chinese espionage," adding that it was "crazy to allow them to operate in the U.S. without tighter restrictions."

Moreover, the ZTE issue represents just one aspect of U.S.-China tension. Trump's pet issue, the trade deficit, has seen little progress. Beijing has brushed aside the Trump administration's demands that it cut back on generous subsidies for producers of high-tech goods under its Made in China 2025 initiative.

The U.S. and China are waging fierce battles over advanced tech such as artificial intelligence, autonomous driving and industrial robotics. With both sides having made their positions known, "the gap remains wide," Ross said Monday.

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