The ball is in China's court ahead of big Trump-Xi meeting

Hopes are dim for a rapid conclusion to the U.S.-China trade dispute.

This became clear following the war of words between Vice President Mike PenceMichael (Mike) Richard PenceTrump, Pelosi, Schumer: No adult in the room Anti-wall is not a border policy: How Democrats can sell an immigration plan Protesters host dance party outside Stephen Miller's home MORE and Chinese President Xi Jinping at the recent Asia-Pacific Economic Cooperation (APEC) summit and after the U.S. Trade Representative’s (USTR's) updated Section 301 report released Tuesday that details China’s lack of progress in addressing U.S. complaints related to intellectual property, technology transfer and cybersecurity.

President Donald Trump and President Xi are expected to meet in Buenos Aires on Nov. 30, but even if this encounter comes off without acrimony, it will likely the start of a long period of negotiations.

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Chinese offers to buy more U.S. products, such as the soybeans that still await purchasers, will not be enough when the U.S. is looking for fundamental change, i.e., for China to pay for technology rather than steal it and to allow U.S. firms to invest in China without forcing them to hand over corporate secrets.

The USTR report, unfortunately, indicates that rather than moving toward a solution, China “appears to have taken further unreasonable actions in recent months.”

What the Chinese side does not appear to understand is that U.S. concerns over investment and technology are bipartisan. Democrats and Republicans seem to fight on nearly everything, but they share the view that important aspects of the change in the U.S.-China relationship must come from the other side.

If anything, look for Democrats to try to be tougher than Trump on trade in an attempt to reclaim the issue ahead of the November 2020 election.

Even groups in the U.S. business community who are traditionally friends of China are frustrated by the lack of progress on intellectual property rights, forced technology licensing and transfer, antitrust enforcement and cybersecurity and data protection.

The implication is that the trade dispute will deepen before it improves, with the next step scheduled to take effect on Jan. 1 with an increase in the tariff rate on $250 billion of Chinese imports from 10 percent to 25 percent.

The task for China is to come forward with enough progress to head this off — a challenge when the first step remains for Chinese officials to recognize that the ball is in their court.

Progress matters for the both countries because the impact of the trade war can be seen in markets and in the economy. Concerns over the profitability of high-flying tech firms have driven Wall Street volatility, but so too has the uncertainty of the trade war.

The prospect of steeper tariffs and Chinese retaliation likewise seems to be holding down business investment, which has lagged even while overall GDP growth surged in the middle of this year.

Persuading American firms to ramp up investment in new factories, software and offices would help sustain U.S. growth at 3 percent even as the near-term stimulus of the December 2017 tax cuts recedes in 2019 and beyond.

The stakes are high for China as well. President Xi need not worry about a sagging economy affecting his re-election prospects — China dispensed with the previous two-term limit in February.

But Chinese growth still depends heavily on exports, and long-lasting tariffs will gradually persuade firms to shift production to other low-cost producers.

There is yet time to head-off serious and long-lasting economic fallout, but not unlimited time. Look for a deal by the end of March 2019 that includes:

  • a Chinese commitment to buy more U.S. products such as agriculture and energy;
  • better access for U.S. companies to both export to and invest in China, including in financial services, autos, telecom and health care; and
  • follow-through on Chinese commitments to protect intellectual property such as by imposing harsher penalties for violations.

Technology competition between the U.S. and China is here to stay, and China will continue to favor its state-owned enterprises. Even so, China can take a big step toward defusing tensions by acknowledging that U.S. complaints are valid and then by demonstrating initial progress in addressing them.

This would then allow President TrumpDonald John TrumpAustralia recognizes West Jerusalem as Israeli capital, won't move embassy Mulvaney will stay on as White House budget chief Trump touts ruling against ObamaCare: ‘Mitch and Nancy’ should pass new health-care law MORE to play his seemingly-preferred role of pragmatic dealmaker, backing away from the trade war in the interest of U.S. and global economic growth.

That’s the good scenario. The bad one is that China holds fast — and takes its own and global growth down with it.

Phillip Swagel is a professor at the University of Maryland’s School of Public Policy and a senior fellow at the Milken Institute. He was assistant secretary for economic policy at the Treasury Department from December 2006 to January 2009.