Trump's latest tweets create another twist in U.S.-China trade talks

With a couple of tweets, U.S. President Donald Trump may have brightened the mood of this week's trade talks between China and the United States.

But he's also increased confusion here in Beijing. In this months-long stand-off, does this latest twist from Trump create breathing room or a bargaining chip?

A high-level Chinese delegation led by President Xi Jinping's top economic adviser, Vice-Premier Liu He, will meet with U.S. officials in Washington on Tuesday. This is the second round in so-far fruitless discussions to head off a trade war between the world's two biggest economic powers.

Trump has pushed for tough measures to force China to reduce a record $375-billion US trade deficit in 2017 and to punish Beijing for what Washington calls theft of intellectual property by Chinese technology companies. Specific targets for U.S. action are set to be finalized next week.

So, what to believe from Trump now? A sunny Sunday tweet saying "be cool, it will all work out!" Or previous dark threats from Trump that China is engaging in "unfair," "stupid trade" that "cannot continue?"

Notably, Trump is now promising a possible reprieve for Chinese cell phone maker ZTE, which is on the verge of being wiped out by U.S. legal action.

In a second tweet, he said he's instructed officials to ease restrictions recently imposed on ZTE so it can "get back into business, fast."

"Too many jobs in China lost," Trump wrote. "Commerce Department has been instructed to get it done!"

A controversial firm

The big Shanghai company announced last week that it had ceased "major operating activities" after the U.S. Commerce Department banned American companies from selling to the firm for seven years. This, as punishment for ZTE breaking an agreement reached after it was caught illegally shipping U.S. goods to Iran.

ZTE's 75,000 employees make phones and telecommunications equipment shipped to 160 countries, using key American components such as microchips and operating systems unavailable from China.

The ZTE case is technically separate from Washington's broader trade crackdown, but in China, it has become a symbol of what many consider U.S. bullying.

"The U.S. should be aware that it must become more cooperative and constructive in the trade talks with China," said the China Daily, the country's official English-language newspaper, in a Monday editorial.

"It should bear in mind that the outcomes of dialogue should be mutually beneficial and China will not accept its interests being damaged," the newspaper said, adding that Washington must "cast away its unilateral mentality."

Online in China on Monday, reaction to Trump's latest comments was skeptical.

"This is Trump's strategy," said one comment on Weibo, China's popular (and officially monitored) microblogging platform. "I hit you when I want to, I save you when I want to."

Another user said with Trump's unpredictability, "I foresee a tough trip for Chinese negotiator Liu He."

Ongoing trade tensions

Indeed, increased tensions over trade — and the specific case of ZTE, which highlights gaps in China's technological know-how — have piqued nationalists, including President Xi.

Insiders have told western media organizations he is "irate" over ZTE's predicament, especially since he has marked his leadership with an emphasis on a "rising China," ready and able to take its rightful place as a world leader.

The first round of trade talks in Beijing only seemed to push the sides farther apart.

The U.S. delegation, led by Treasury Secretary Steven Mnuchin, left a list of demands that was quickly leaked and circulated on Chinese internet.

Among other things, it insists China reduce the trade deficit by $100 billion US in the next year and another $100 billion US the year after. It calls for an end to all government subsidies to advanced manufacturing industries, including microchips and artificial intelligence technology. And it demands that Beijing accept U.S. restrictions on Chinese investments in sensitive industries without retaliation.

Chinese observers who understand official thinking say Beijing will push back against U.S. "ultimatums."

"You cannot threaten the biggest market in the world with a trade war," says Ding Yifan, senior researcher of the National Strategy Institute at Beijing's Tsinghua University. "You cannot win a trade war with the biggest market in the world. It's ridiculous," he says with a laugh.

'We can bear this kind of loss'

Economic simulations suggest even the most drastic U.S. moves would result in a 0.8 per cent drop in China's GDP, from 6.8 to six per cent, says Ding.

"It's not so much. We can bear this kind of loss," he says.

Economist Maiojie Yu from Peking University's National School of Development says if Washington does go ahead and impose sweeping trade measures, including tariffs, China's immediate strategy should be two-fold: First, to retaliate by matching the measures, and second to turn to other suppliers, especially European, to make up for shortages in chipsets and other technology.

"If the U.S. will not sell chipsets, other European countries will do that," Yu says. "They are almost an exact substitute."

"In the short run, this may have some harm to China's chip industries," he says, "but in the long run, this gives pressure to these industries … they should work on their own innovation."

Yu says it would take about a decade for Chinese companies to come up with domestic alternatives.

That is Plan B. For now, both sides say publicly — including in tweets — that a deal to avoid a trade war is still possible.