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Party Hacks and the End of the Deng Era.

There seems to be a mismatch in how participants in the U.S.-China trade dispute view their priorities. U.S. negotiators are fixated on reaching an agreement that includes provisions (with penalties) protecting intellectual property rights. By contrast, the Chinese leadership seems to be living in a different world. For them, the most serious and threatening issue is the demand by the United States for elimination of subsidies for Chinese state-run enterprises.

Indeed, the Chinese Communist Party is divided into two groups on the economic/trade issue. The first group is made up of the reformers who want to use the current turmoil in financial markets caused by the trade war as a means of pressuring the party's domestic interests to agree to reform. Chinese Vice Premier Liu He, a well-known figure in Washington, is the leader of this group.

The second group is made up of the old-line special interest groups, including the military. For them, the subsidies are hugely important. If eliminated, their positions within the power structure would be severely eroded.

In the beginning, President Xi is said to have supported his vice premier and the reformers. But of late, the Chinese leader appears to have changed his position, siding now with the old guard. The upshot is that it could turn out to be very difficult for Xi to accept a deal with the United States that curtails subsidies. Agreeing to buy specified amounts of U.S. goods and services is relatively easy. Taking on domestic interest groups in eliminating the subsidies represents a more challenging obstacle to overcome.

China's trade hardliners are said to have convinced Xi that subsidies are the only way for China to dominate prices in the global market for exports such as steel and other typical industrial products. But most importantly, there is China's emerging high-tech sector. That sector was initially given huge subsidies from the state and, assisted also by technology theft, is now emerging quickly on the global scene in today's new era of artificial intelligence. The old liners' message to Xi: China's new position potentially as a global tech leader wouldn't be happening without those subsidies. All of which raises the question of whether a U.S-China trade deal is even possible. Is the Deng era of Chinese reform over for good? Has a visionary giant been sidelined by the party hacks?

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Title Annotation:OFF THE NEWS
Publication:The International Economy
Geographic Code:9CHIN
Date:Mar 22, 2019
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