Why a trade deal is not likely to solve all vexing US-China issues

The United States and China are not likely to resolve all the issues that divide them before presidents Donald Trump and Xi Jinping meet in Busan, South Korea, on Thursday (October 30).

But they are likely to make enough progress on China’s stranglehold on strategic minerals, American export controls and other nettlesome problems to calm financial markets and prevent their rivalry from doing much more economic damage for now.

“They’re trying to get to some kind of detente,” news agency AP quoted Jeff Moon, a former US trade official and diplomat who now runs the China Moon Strategies consultancy, as saying.

“There’s no pretence that they’re going to reach a grand bargain that solves everything in the relationship.” The two countries sent out reassuring signals over the weekend that an agreement was drawing closer.

Both upbeat over talks

China’s top trade negotiator, Li Chenggang, told reporters that Washington and Beijing had reached a “preliminary consensus.”

Trump’s treasury secretary, Scott Bessent, said there was “a very successful framework”. Trump himself expressed confidence, saying Chinese officials “want to make a deal and we want to make a deal.”

Before the talks in Kuala Lumpur, Malaysia, over the weekend, US and Chinese negotiators had previously met four times this year — in Geneva in May, London in June, Stockholm in July and Madrid in September — but had only managed to reach a truce to avoid escalating tariffs and a vague deal “framework,” not anything of substance.

Also read: US, China reach framework for potential trade deal

When new tensions rose earlier this month, Trump threatened to slap another 100 per cent tariff on Chinese products from November 1.

But in a sign the two countries are making progress, Bessent said at a news programme on Sunday that those punishing triple-digit levies are “effectively off the table” as talks continue.

Here are some of the areas of contention between the world’s two biggest economies.

Beijing’s rare earths

China is the world’s leading producer and processor of rare-earth minerals and related technologies critical for fighter jets, robots, electric vehicles and a host of other high-tech products.

In a show of strength and of the leverage it brings to the negotiating table, the country has limited exports of the elements, crippling US and other foreign companies. Most recently, they tightened the restrictions October 9, just ahead of the Trump-Xi summit.

The US and other countries are investing heavily in rare earths to break China’s domination but it may take years for that to pay off.

Bessent said on Sunday that he expected China to “delay” the rare earth export controls “for a year while they reexamine it”.

China’s soybean purchases

Rare earths aren’t the only leverage China has. American farmers — among Trump’s most loyal supporters — have traditionally depended on China to buy about a quarter of the soybeans they produce. But China has stopped buying American soybeans this year, choosing to use Brazilian and Argentinian suppliers instead.

Also read: China, ASEAN sign upgraded free trade agreement in Malaysia

On another media programme on Sunday, Bessent, who owns soybean farmland himself, suggested that relief might be coming to the American heartland. “We are going to be able to discuss substantial soybean and [agricultural] purchases for American farmers,” he said.

US export controls

China is hoping for relief from America’s stringent controls of sensitive tech exports that Chinese firms rely on.

Last month, the US Commerce Department issued a new rule to drastically extend export restrictions not only to previously blacklisted foreign companies but to affiliates in which they own stakes of at least 50 per cent.

Jeffrey Kessler, Under Secretary of Commerce for Industry and Security, said the rule will be “closing the loopholes and ensuring that export controls work as intended”.

China immediately protested, calling it another “typical case” of the US broadening national security and abusing export control. The Chinese Commerce Ministry says the act is “extremely bad” and will “severely harm the legitimate interests of companies.”

Still, Bessent said “there have been no changes in our export controls”.

Drug-trafficking tariffs

In February, Trump slapped a 10 per cent tax on Chinese imports to pressure Beijing to do more to stop the flow of chemicals that can be used to make fentanyl. He doubled it a month later.

Also read: Rare earths: Deng Xiaoping's vision, China’s advantage, and India’s race against time

For months, Beijing has been frustrated over lack of progress in working out a deal to end the fentanyl tariffs. A senior Chinese public security official once travelled to one of the trade talks but there was no US counterpart to meet him.

Chinese officials had expressed exasperation that the Trump administration failed to recognise the steps Beijing took in the last year of the Biden administration to address drug trafficking.

They are also confounded because the Trump administration hasn't been clear about what it wants Beijing to do. China has retaliated by levying a new 10 per cent or 15 per cent tariff on many US farm goods, including soybeans.

Bessent said Sunday that discussions with China yielded initial agreements to stop the precursor chemicals from coming into the US, raising hopes that the US will consider at least reducing the fentanyl tariffs.

Chinese overcapacity

Whatever progress the two countries make on specific issues, bigger problems remain, Moon told AP.

The toughest is that China has decided to pull itself out of an economic rut caused by the collapse of its housing market by cranking out factory production and flooding the world with low-priced products.

Also read: Trump: Will reach 'fantastic deal' with Chinese President Xi Jinping

But the United States and other wealthy countries are determined “not to let Chinese overcapacity hollow out their industries and destroy their industrial base,” Moon said.

“We can’t decouple. There are things that we both need from each other.... If you continue trying to damage the other side with no end in sight, then both sides die the death of a thousand cuts.”

(With agency inputs)