Beyond Trump-Xi Bond, White House Looks to Toughen China Policy

By Lingling Wei, Jacob M. Schlesinger, Jeremy Page and Michael C. Bender Features Dow Jones Newswires

A month before President Donald Trump's visit to Beijing, Chinese officials presented an offer they thought Washington couldn't refuse.

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China proposed that during the trip, Mr. Trump and his counterpart, Xi Jinping, unveil a plan to widen foreign firms' access to China's vast financial industry, according to people with knowledge of the matter. It was a move previous U.S. administrations had sought for years.

To Beijing's consternation, according to the people, Washington wasn't interested. The offer was made a second time during one of Mr. Trump's meetings at the Great Hall of the People. Hours after Air Force One took off from Beijing, China announced the opening on its own.

The cold shoulder from the White House reflects a fundamental shift in how the U.S. manages it relationship with China, one that suggests a bold gamble and a rocky road ahead despite the bonhomie of the presidential summit earlier this month in Beijing.

The financial opening initially attracted wide attention from market participants, and Beijing called it evidence of its commitment to market liberalization. U.S. reaction has been tepid. A White House spokeswoman on Friday called it "welcome but long overdue" and said: "It is also only one of a plethora of problems China needs to address in order to provide fair and reciprocal access to its market."

The Trump administration, which recently completed a comprehensive review of China policy, is rejecting the longstanding practice of eking out concessions from Beijing on trade and market access around high-level meetings.

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To Mr. Trump and his aides, that approach has yielded few substantive benefits but allowed China to continue policies that put American businesses at a disadvantage. One White House official refers to that pattern as Beijing's "rope-a-dope" strategy. The administration is now investigating trade sanctions or enforcement actions against China with the goal of fundamentally challenging Chinese trade practices.

The White House is also trying to invest in the personal relationship between Mr. Trump and Mr. Xi in order to absorb some of the shock of the coming trade measures.

That helps explain Mr. Trump's unorthodox blend of tough talk on trade and effusive praise for Mr. Xi in Beijing. In China and around the globe, the White House is aiming to make an asset out of Mr. Trump's unpredictability, which has been criticized by foreign-policy experts as a destabilizing influence on international negotiations over trade and national security.

"The U.S. now believes that only the threat of unilateral action will compel China to change," says Scott Kennedy, a deputy director at the Center for Strategic and International Studies, a Washington think tank.

The new China strategy carries considerable risk. Some policy experts fear it could set off a trade war. Others, especially advocates of harsh sanctions, worry Mr. Trump might not follow through if Beijing steps up its charm offensive with further attempts to flatter him or if his agenda becomes monopolized by domestic issues, especially the tax overhaul proposed by the Republicans in Congress.

Still, in Beijing, the prospect of a much tougher U.S. stance is starting to sink in. China had hoped to show it is doing its part to improve the relationship by granting Mr. Trump a "state-visit-plus" -- including a private dinner with Mr. Xi in the Forbidden City -- and opening the financial sector.

"China realizes that it can't continue to drive away foreign capital," says He Fan, a professor at Peking University HSBC School of Business. "It likely will take more measures to open up its economy."

Beijing is likely to point to any opening measures, however symbolic, to argue against unilateral action by Washington.

Under the new financial opening, Beijing pledged to let foreign securities firms own majority stakes in their Chinese ventures and to scrap foreign ownership limits on Chinese banks. Officials indicated the security-industry changes would be limited, at least initially.

Western officials treat such pronouncements with skepticism, pointing to China's poor follow-up record and saying hurdles have grown despite similar pledges in the past.

"This opening-up comes at a late stage in development," said the European Chamber of Commerce in a statement. "It is now difficult for foreign firms to capitalize on these changes as domestic Chinese firms have stronger positions in their respective industry."

Such views are shared by U.S. officials. "The overall approach now is not to negotiate over crumbs, not celebrate small deals that will have limited impact," one official said.

While attending meetings by the International Monetary Fund and the World Bank in Washington in October, China's Vice Finance minister Zhu Guangyao told U.S. officials about the new financial-opening plan, according to the people familiar with the discussions. The Chinese side had expected U.S. officials would welcome the proposal and agree to roll it out as a breakthrough during Mr. Trump's visit to Beijing.

Instead, U.S. officials called it too little too late.

"We said, 'No, we're not going to take your gifts because you're just trying to sucker us,'" said a U.S. official familiar with the discussions. "The idea with China is no negotiation because it will just make us beholden to them and reluctant to slam them on other stuff."

The Trump administration trade team is weighing a half-dozen trade enforcement actions that are aimed directly, or indirectly, at China, with decisions expected by early next year.

The team is looking at invoking a Cold War-era law that was last used in the early 1980s to block steel and aluminum imports in the name of national security. It is also studying dusting off another law last used in 2002 to protect domestic producers claiming to have been damaged by a sudden surge of cheap imports; solar panels and washing machines are goods in focus.

Shortly before Mr. Trump's trip to Beijing, the Commerce Department issued a lengthy study justifying the continuing branding of China as a "nonmarket economy," a status that allows the U.S. to impose extra high duties on Chinese imports found to have been illegally subsidized or "dumped" below production costs. Commerce has since imposed duties of up to 162% on Chinese aluminum foil and 194% for hardwood plywood. China has filed a complaint over that designation to the World Trade Organization.

At the same time, Mr. Trump's trade agency is building a broad case to charge China with "unfair trade practices" by improperly pressuring American companies to turn over valuable intellectual property as the price for entering the Chinese market.

Still, the question is when, or whether, the administration will actually take action on these fronts. So far, trade enforcement has taken a back seat to White House priorities such as winning passage of a tax cut and securing Chinese cooperation to curb North Korea's nuclear program.

U.S. officials have struggled to find remedies that won't trigger a wide backlash from industries that consume Chinese products or free-trade Republicans in Congress. Excessively harsh sanctions could also provoke a full-blown trade war, some policy experts say.

Although an open line to Mr. Xi could help in managing a trade crisis and allow for more meaningful deal-making, efforts to forge a personal rapport with previous Chinese leaders have rarely borne fruit.

"The development of personal relations is a fact, not a strategy," the White House spokeswoman said. Messrs. Trump and Xi "seem to have established a good personal relationship, as the president has with many world leaders," she added.

Already, some supporters of Mr. Trump's promised China trade crackdown have grown frustrated at the limited results. The Alliance for American Manufacturing, a group formed by the United Steelworkers union and U.S. steelmakers, praised Mr. Trump in April when he launched his study on national-security steel tariffs, and his aides had promised action by June.

Now, they have launched a petition drive protesting the delays and demanding the administration follow through.

The deadline "is long past -- and still no action," the petition reads. "President Trump pledged to stand up for America's working class -- and it's time for him to make good on his word."

Write to Lingling Wei at lingling.wei@wsj.com, Jacob M. Schlesinger at jacob.schlesinger@wsj.com, Jeremy Page at jeremy.page@wsj.com and Michael C. Bender at Mike.Bender@wsj.com

(END) Dow Jones Newswires

November 19, 2017 18:37 ET (23:37 GMT)