As another fruitless round of China-US talks to avert a trade war wrapped up in Washington on August 23, foreign officials were arriving in the US capital for a potentially far more consequential meeting the next day. The occasion was an unusual trilateral forum that brings together trade officials from the US, EU and Japan.
Their mission: to combat the allegedly unfair trading practices by unspecified “third countries”.
When US trade representative Robert Lighthizer and his EU and Japanese counterparts announced their initiative on the sidelines of last December’s World Trade Organization meeting in Buenos Aires, they did not single out any one country for fostering allegedly “unfair competitive conditions caused by large market-distorting subsidies and state-owned enterprises, forced technology transfer and local content requirements”.
But there was little doubt about the identity of the elephant in the room. As EU trade commissioner Cecilia Malmstrom said at the time: “There’s no secret that we think China is a big sinner here.”
The trilateral gathering represents a potentially critical shift in the confrontation between Washington and Beijing. Chinese Communist party and government officials are confident they can cope with a full-scale trade war with the US, which increasingly feels like a foregone conclusion in Beijing. On Saturday, Chinese officials woke up to President Donald Trump’s threat to tax all Chinese exports to the US — worth more than $500bn last year — within months. On Sunday, they were greeted by a presidential tweet admonishing Apple to repatriate its China-based supply chain.
What really keeps them up at night, however, is a potential co-ordinated assault by the Trump administration, EU and Japan on their unique model of Chinese “state capitalism” that has been integral to the country’s economic success over the past 40 years.
In recent months the EU and Japan have joined forces with the US in WTO complaints against “forced technology transfers” in China through mandatory joint venture structures with local partners. “No country should require or pressure technology transfer from foreign companies to domestic companies through the use of joint venture requirements, foreign equity limitations, administrative review and licensing processes,” Mr Lighthizer, Ms Malmstrom and Hiroshige Seko, Japan’s minster for economy, trade and industry, said in a joint statement in May.
After a period when Mr Trump picked trade fights with any number of countries, Beijing worries that he has stumbled on to a more effective trade strategy that involves isolating China.
“These sorts of moves make the Chinese very nervous,” says Eswar Prasad, a former head of the IMF’s China division who now teaches at Cornell University.
In private conversations, Beijing officials say they could not believe their luck when the US president this year simultaneously initiated trade actions against China, the EU, Canada, Mexico, Japan and South Korea. Mr Trump’s initial scattergun approach took a lot of heat off Beijing, which is supported by Brussels and Tokyo in a WTO suit challenging US tariffs on imported steel and aluminium.
But since the now famous photo of Mr Trump squaring off against his G7 allies at their June summit in Quebec, there have been signs that three of the world’s four largest trading powers may indeed combine forces to pressure China. In addition to Mr Lighthizer’s talks with Brussels and Tokyo, the Trump administration is working to solidify its recent trade truces with the EU and Mexico, and agree on a revamped Nafta pact with Canada.
Many are sceptical that the US president will succeed in training his fire on China alone. “For that to happen, Trump would have to behave in a very different way,” says one senior European banker. “The Europeans don’t trust him — and they shouldn’t.” His recent threat to leave the WTO, the banker notes, is an example of the kind of erratic behaviour that could rupture any alliance with the EU and Japan, which prefer to work through the multilateral trading body.
Mr Trump’s frenetic summer trade talks with the EU, China, Mexico and Canada have nonetheless added to the pressures building on President Xi Jinping, who a year ago was coasting towards a Chinese Communist party congress that confirmed his status as the country’s most powerful leader.
“In 2017 the mood in Beijing was, ‘everything is going great’,” says one person who has met Liu He, Mr Xi’s economic tsar, and other top Chinese officials in recent weeks. “This spring they thought Trump’s tariff threats were a road bump. Now they know it’s not a road bump and even if Trump dies tomorrow, this problem is not going away. They also realise they have trade problems with Europe.”
When European Commission president Jean-Claude Juncker travelled to Beijing for a bilateral summit in July, he bluntly told premier Li Keqiang that he shared many of Mr Trump and Mr Lighthizer’s concerns about Chinese state capitalism. “His message to Li was we don’t necessarily like Trump’s methods, but it’s not like he’s imagining all this stuff,” says one person who sat in on a meeting between the two men.
For its part, Tokyo has been pleasantly surprised by a Beijing-initiated rapprochement over the past year. According to one Japanese official, a recent spate of Chinese overtures are all “thanks to Trump”. The official adds: “Trump’s trade policies have been influencing China’s diplomatic stance.”
But while prime minister Shinzo Abe is happy to seize on any opportunity to reduce tensions with Beijing, he is far more concerned about maintaining good relations with his US military ally.
“China wants us to join their straightforward criticism of Trump’s trade policies, which we are of course very concerned about,” the official adds. “But we are also basically in total agreement with Trump’s viewpoints regarding market access and other