◎ Trump’s ZTE tweet suggests that our read of America and China making good progress in trade talks is correct.
President Donald Trump’s May 13 tweet about working with Chinese leader Xi Jinping to help ZTE find “a way to get back into business, fast” raised many eyebrows. (See our earlier article for more on the ZTE ban.)
SinoInsider, however, has been anticipating a U.S. reprieve since the conclusion of the Sino-U.S. trade talks in Beijing on May 4. We wrote at the time that, “Washington could put ZTE on ‘probation’ and very stringently monitor its future dealings with the Chinese company.” In another analysis, we wrote that “how the U.S. handles ZTE’s request would be a litmus test of the outcome of the Sino-U.S. trade talks.”
Trump’s ZTE tweet suggests that our read of America and China making good progress in trade talks is correct. Other developments around the same period also show how closely intertwined Sino-U.S. trade negotiations are with the situation in North Korea and Iran. Indeed, the Trump administration appears to be using trade with China as both leverage and a bargaining chip to ensure that Beijing cooperates with America on key international issues. And pending the outcome of trade talks when Chinese vice premier Liu He visits Washington, the Trump administration’s “maximum pressure” strategy against the Chinese regime could significantly reduce the vast trade imbalance between China and the U.S. to America’s benefit, and push Xi Jinping to accelerate the opening up of China’s markets.
Sino-U.S. trade
The backdrop:
May 3-May 4: A team of leading Trump administration trade officials held talks with their counterparts in Beijing. Officially, both sides handled the other a list of tough demands, and trade negotiations appeared to have stalled.
May 7: The White House confirms that Liu He would be visiting Washington in the week of May 14.
May 8: Trump and Xi have a telephone call where they discussed trade and North Korea. Before the call, Trump tweeted that “good things will happen” with Sino-U.S. trade.
May 10: Senior Chinese commerce ministry official Wang Shouwen arrives in Washington for preparatory discussions before Liu He’s trip. Wang was expected to hold talks with U.S. officials through the weekend.
May 11: Cui Tiankai, the Chinese Ambassador to the United States, said at an event at the Centre for Strategic and International Studies in Washington that the trade imbalance between China and the U.S. is “already a problem rather than a benefit.”
May 13: Trump tweets: “President Xi of China, and I, are working together to give massive Chinese phone company, ZTE, a way to get back into business, fast. Too many jobs in China lost. Commerce Department has been instructed to get it done!”
Trump later tweeted that China and the U.S. have been “working well on trade” but past negotiations favored China to the point where “it is hard for them to make a deal that benefits both countries.” He added, “be cool, it will all work out!”
May 14: Liu He’s DC trip is confirmed for May 15 to May 19. People with knowledge of Sino-U.S. negotiations from both countries told The Wall Street Journal that China would not impose tariffs on U.S. agricultural goods in exchange for a reprieve on the ZTE ban. China’s Commerce Ministry also announced a review of Qualcomm’s acquisition of NXP Semiconductors NV, which Beijing previously delayed along with other recent cross-border deals involving American firms.
In the late afternoon, Trump tweeted: “ZTE, the large Chinese phone company, buys a big percentage of individual parts from U.S. companies. This is also reflective of the larger trade deal we are negotiating with China and my personal relationship with President Xi.”
Our take:
1. The U.S. Commerce Department would unlikely grant ZTE a full reprieve. Expect ZTE to be placed under some form of “probation” and its business with American companies strictly monitored. Bans on selling ZTE equipment to U.S. government or military should be kept in place.
2. U.S. criminal investigations into Huawei, China’s other state-backed telecommunications giant, should continue. Expect the Trump administration to clamp down on both Huawei or ZTE should they again flout U.S. sanctions like selling to Iran, severely violate U.S. law, or are found to be an immediate and serious threat to U.S. national security.
3. Depending on the success of Liu He’s Washington trade talks, the U.S. could suspend the Section 301 tariffs on China. Beijing would likely agree to meet U.S. demands to substantially reduce the trade deficit by $200 billion by 2020, and open up China’s markets to a greater degree.
4. Beijing could agree to purchase more autos, airplanes, agricultural products, natural gas, and oil products from the U.S. to reduce the trade deficit. Beijing could also end its forced technology transfers in manufacturing, and allow foreign companies to take up majority shares in Chinese companies. Expect Beijing to quietly dial back its trade with Iran.
5. The Chinese Communist Party (CCP) would offer genuine concessions to the U.S. because China presently cannot withstand an all-out trade war with America. Like the North Korean regime, the CCP would do anything to ensure regime survival. The CCP, however, would never publicly admit to making concessions. Expect state propaganda to spin future opening up measures and deals with America as being part of its ongoing reform plans. And if recent state media commentary is a guide, the CCP should dial back the use of abrasive rhetoric in future articles about trade relations with the U.S.
To consolidate the concessions, the Trump administration should continue to give face to Xi Jinping. An example is Trump’s tweets about ZTE. At the macro level, the Trump administration’s trade moves would gradually weaken the CCP to a point where it is incapable of resistance.
North Korea and Iran
The backdrop:
May 8: Trump withdraws the U.S. from the Joint Comprehensive Plan of Action, or the Iran deal. Meanwhile, Secretary of State Mike Pompeo meets with North Korean leader Kim Jong Un in Pyongyang to finalize the details of the Trump-Kim summit.
May 9: Pompeo returns from Pyongyang with three Americans who were imprisoned and freed by North Korea.
May 10: Trump tweets that his summit with Kim would be held in Singapore on June 12.
May 11: In a joint address with South Korean Foreign Minister Kang Kyung-wha, Secretary Pompeo said that North Korea can gain “a future brimming with peace and prosperity” if Kim Jong Un “takes bold action to quickly denuclearize.” The U.S. is “prepared to work with North Korea to achieve prosperity on the par with our South Korean friends,” he added.
May 12: North Korea’s foreign ministry announced that it would dismantle its nuclear testing site on May 23. Journalists from China, Russia, South Korea, the U.S. and the U.K. would be invited to cover the event.
May 13: Trump tweets about ZTE and trade with China.
Pompeo and National Security Advisor John Bolton talk about North Korea and Iran in separate interviews on U.S. television networks. Both Pompeo and Bolton said that America would allow U.S. private investors to help North Korea rebuild its economy and infrastructure after it has taken concrete steps to achieve complete and irreversible denuclearization.
Additionally, Pompeo implied that the Trump administration would not seek to oust Kim if he abandons his nuclear weapons, while Bolton suggested that North Korea would also have to give up its chemical and biological weapons program and free Japanese and South Korean prisoners. Bolton said in his interview that the prospect for North Korea is to become a “normal nation” like South Korea, and that its future is “unbelievably strong” pending complete denuclearization.
Our take:
1. Good progress on Sino-U.S. trade discussions aside, Trump’s “reversal” on ZTE is almost certainly linked to strong Chinese cooperation in sanctioning North Korea and Xi Jinping getting Kim Jong Un to pledge denuclearization and peace.
2. If ZTE is indeed given reprieve but placed under some form of “probation,” then Beijing would likely cooperate with the U.S. in dealing with Iran.
3. Trump administration officials have stressed that Trump would walk out of his summit with Kim if discussions do not work out. But Kim releasing U.S. prisoners and dismantling the North Korean nuclear test site without the U.S. making any prior concessions suggest that he is serious about meeting U.S. demands. Mike Pompeo and John Bolton’s comments about helping North Korea achieve economic prosperity if it completely denuclearizes and shifts its strategic goals also hint that Kim is considering reform and opening up measures.
4. America’s pledges of private sector economic assistance may have significant ramifications on a post-nuclear Korean Peninsula. We believe that North Korea would be more inclined to draw closer to South Korea economically for ethnic and cultural reasons. Kim may also seek to establish stronger ties with the U.S. as opposed to China to avoid being a Chinese “buffer state.” North Korea and China were, after all, not always on the best of terms historically, and their relationship blew hot and cold even when both countries turned to communism after the Second World War.
5. We wrote in 2017 that Xi Jinping would likely abandon North Korea should Kim Jong Un’s provocations lead to war with America. And when the Kim regime collapses, Xi would eventually come under pressure to turn away from communism. Should a post-nuclear North Korea distance itself from Beijing and forge close ties with South Korea and America, the CCP faces precisely the same fate as in the scenario where North Korea tempts conflict with the U.S.
