Behind The China Trade Deal Delay: Enforcement Concerns, Trump’s Pride

A trade deal between the U.S. and China has remained elusive because of the difficulty in building an enforcement mechanism on intellectual property protections and other systemic concerns about the Asian country, analysts told International Business Times.

But some analysts also pointed out that President Trump’s wariness of failure in another high-stakes negotiation -- after the ones with Democrats over the border wall and with North Korea over denuclearization -- could be making him delay a planned summit with his Chinese counterpart to stitch up a trade deal.

“I would think the White House is conscious of not having a third failed negotiation here,” said Robert Kyle, partner, international trade practice, at Hogan Lovells. “They are viewed as having lost the negotiation with Congress over the border wall. Then the meeting with Kim Jong Un ended in no agreement. I would think the White House does not want a third failed negotiation, a meeting with Xi on the trade issue that ends in failure. The bloom is already off the rose about Trump being a master negotiator, but if you start to have three failed negotiations it starts to have a three strikes dimension to it.”

Trump had previously said the U.S. and China were "getting very, very close" to a deal and hinted at a meeting with Chinese President Xi Jinping at his Mar-a-Lago resort in Florida by end-March.

“President Trump doesn't like to lose and wants to prove a point,” said Ole Rollag, CEO at Murano Connect. “It's very hard to try to imagine where normalcy and craziness begins and ends, and vice versa.”

The U.S. and China concluded their latest round of trade talks last week, and U.S. officials have said China made proposals on a number of issues that go further than its earlier commitments. The two countries are set to resume talks in Washington this week.

But Nick Marro, China analyst at The Economist Intelligence Unit, expects China to refuse any domestic reforms that are substantive enough to de-escalate the trade war. “We remain sceptical that any final deal will include the necessary specificity or enforcement measures to ensure Chinese commitment, as has generally been the case with previous bilateral agreements,” he said.

Carlos Dominguez, president and chief investment officer at Element Pointe Advisors, also said China has not offered any promise to change its core system. “The Made in China 2025 plan and their ability to sort of sponsor and not provide a level playing field... that's a by-product of their economic system,” Dominguez said.

And when a deal does happen, it will likely see China get the better end of the bargain, said Max Gokhman, head of asset allocation at Pacific Life Fund Advisors. “This is primarily because a strict enforcement mechanism for ensuring that China sticks to its promises regarding intellectual property protections has not been established yet and likely would take many months to flesh out,” he said.

Still, Trump has more leverage in talks with China as compared to his earlier deals including the USMCA (United States-Mexico-Canada Agreement), which had lacked Congress support.

“Much of Congress supports the President’s general trade objectives in terms of trying to deal with Chinese intellectual property practices and other structural problems,” said Hogan Lovells’s Kyle.

“China thinks they can buy time and wait for the next president,” said Dominguez. “The reality is this has become a bipartisan issue, so I think the next president, whoever that is, they're not going to let the pressure off China that easily.”

All analysts expect a deal because it is in the best interest of both the countries although it may take longer than expected to iron out. Dominguez said Trump wants to go into the presidential elections next year against a “good economic backdrop and in a market that verifies that things are going well.”

Trade tensions between the two countries have weighed on markets and continue to be a drag on the economy. But unlike in December, analysts think markets are not sagging much right now because a deal with China has already been priced into the markets.

Edward Mermelstein, principal at One & Only Holdings, expects China to make significant concessions, limited to certain areas such as technology, but overall the U.S. stands to fare better from the resolution of this trade war. “But the results are going to take a little bit of time to see and I think once we look back two years from now, we’ll have a clearer picture of who fared well or better from this trade war and the resolution of it.”

NO CLEAR STRATEGY

“It is going on for quite a while… because there are so many different pieces to it and ultimately it also depends on whether the president’s goals can match up with Congressional goals,” said Doreen Edelman, partner and chair of Global Trade & Policy Group at Lowenstein Sandler.

But analysts say there are differences within the White House team itself about how to approach the talks. National Economic Council chief Larry Kudlow and Treasury Secretary Steven Mnuchin want to prosecute the trade agreement aggressively against China, knowing the depressing effect it may have on the markets. But U.S. Trade Representative Robert Lighthizer and Trade Adviser Peter Navarro see this as a once-in-a-lifetime opportunity to change the systemic problems with China.

Kyle of Hogan Lovells said, "The White House must be thinking about this issue: ‘if we don't get a deal now, are we going to get a better deal six months from now?’ This is what the Kudlows and the Mnuchins likely would argue. They might argue the Trump administration would like a better deal, but is that going to materialize down the road. If not, what is our end game?”

Dominguez of Element Pointe Advisors agreed, saying “if it was left to the Lighthizers and the Navarros of the world, the odds of a deal would be very low.”

But he also said U.S. companies are in no rush to invest in China because of the trust deficit between the two countries. “The reality is the decoupling of our economy has started and that is a trend that is going to continue in our opinion.”