The inside story of the trade negotiation that changed the world

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The Case for a Hard Break With China
Policy Brief: End “Permanent Normal Trade Relations” with China
Bad Trade

Adapted from the new book, No Trade Is Free: Changing Course, Taking on China, and Helping America’s Workers.

On November 9, 2017, the American state car, known as “the Beast,” bearing President Trump rolled through Beijing into Tiananmen Square. It was the first official visit of his administration to China. In front of the Great Hall of the People, the red carpet had been literally rolled out for the president and his delegation to which I, as the United States Trade Representative (USTR), belonged.

Chinese officials were very much aware of the positions Trump had taken in his campaign and had set about to charm him by engineering a visit to Mar-a-Lago in Palm Beach in April, right after his inauguration. That visit—with its memorable images of the president’s granddaughter singing a song in Mandarin to the smiling Chinese president and his wife—had succeeded in getting the two leaders off on the right foot. China’s early charm offensive at Mar-a-Lago continued in full force when we arrived in Beijing. In an unprecedented move, President Xi and his wife had given President Trump and Melania a personal tour of the Forbidden City—the vast palace complex that is the ancient seat of Chinese emperors.

The next day, the official meetings began. I found myself sitting in a cavernous room under a crystal chandelier that was perhaps ten feet in diameter. The American and Chinese delegations faced each other in two parallel lines across a gleaming conference table of heroic proportions. At the center of one side was President Xi. On the other side, facing him, sat President Trump with his 12 senior officials. President Trump was flanked by Secretary of State Rex Tillerson and our ambassador to China, former Iowa governor Terry Branstad. I sat next to Tillerson. Despite the warmth of the welcoming ceremonies, this was essentially a meeting between the leading ranks of two armies facing off against each other. As with all such occasions, the opening comments were highly scripted, with the wording having been hammered out in conference with staff and the implications of each phrase carefully weighed in advance.

President Xi read his formal statement, followed by President Trump. Both statements were cordial, raising issues only in the most diplomatic of terms. After that, President Xi called on his foreign minister to make a statement on foreign policy issues. Following protocol, President Trump did the same thing and called on Secretary Tillerson. Then came the curve ball.

I talked about the theft of technology, the failure to protect intellectual property, cyber theft, the lack of progress in the multitude of talks held over the course of the previous two administrations, and the stream of gigantic trade deficits.

Following a short statement on economic issues, President Trump looked briefly in my direction and called on me to speak to the Chinese about our position on trade. I had no carefully scripted statement. For the next several minutes, in a very respectful but direct way, I explained to the Chinese leadership our thoughts on the current trade situation. I talked about the theft of technology, the failure to protect intellectual property, cyber theft, the lack of progress in the multitude of talks held over the course of the previous two administrations, and the stream of gigantic trade deficits. I tried to explain all of this from our perspective, how the American people viewed our economic relationship as an uneven, unfair one that wasn’t sustainable and how it had affected people’s lives in many communities.

The Chinese appeared surprised by my statement. There was a pause. The group grappled with an appropriate response to an outbreak of candor in the midst of a highly choreographed meeting. As if by some silent consensus, their delegation then continued to read the rest of their formal statements.

Opening Moves

By this time, we were three months into the process of rebalancing a trading relationship that had gone catastrophically awry over the prior two decades. The U.S. decision to grant China Permanent Normal Trading Relations (PNTR) and support its ascension to the World Trade Organization (WTO) in 2001 had been a fundamental error that allowed China to seize leadership in vital industries while hollowing out American manufacturing. Under PNTR, the United States committed to offering China our most favorable trade terms, in perpetuity, removing much of the leverage that we could otherwise exercise in attempting to maintain a level playing field for trade with China.

The WTO, instead, would now enforce the rules. But working through its official channels brought frustration to a fine art and its arcane rules structured any complaints in very specific terms that precluded addressing problems at the level of their root causes. Even when the WTO chose to act in our favor, there was no effective means to enforce compliance.

If we wanted to confront China’s abuses, the United States had no choice but to act on its own. But how could we find room to move within the strictures of U.S. law? My solution to this problem lay in the revitalization of a legal tool called Section 301. This provision of the Trade Act of 1974 states that if there is an “act, policy or practice” of a foreign government that is “unreasonable or discriminatory” and “burdens or restricts U.S. commerce,” the president, acting through the USTR, can take “all appropriate and feasible action” to counteract that policy. This includes placing tariffs and restrictions on products imported into the United States.

Section 301 has been used several times over the years, mostly to give some teeth to trade negotiations. I constantly had it on my desk during my time as deputy USTR in the Reagan administration, and when negotiations with South Korea over carbon steel stalled in 1984, I threatened to go to the president and ask for authority to bring a Section 301 case, which could have ended their access to the U.S. market. This move was effective—we ended up making a deal. Later, the Clinton administration used Section 301 in a similar way, as leverage in negotiations with Japan on auto trade.

No president had ever attempted to use this authority to broadly attack massive and damaging unfair practices like China’s. No one had ever used it to impose large tariffs on a trading partner. This powerful tool was just sitting on the shelf.

I had long believed that putting appropriate tariffs on Chinese imports to the United States was the only feasible way to address China’s systemic mercantilist practices. I proposed to President Trump that we revitalize Section 301 for this purpose, as well as to make maximum use of the powers that it gave the president to exert leverage in negotiations. No president had ever attempted to use this authority to broadly attack massive and damaging unfair practices like China’s. No one had ever used it to impose large tariffs on a trading partner. This powerful tool was just sitting on the shelf.

On August 14, 2017, in the White House diplomatic reception room that once hosted Franklin Roosevelt’s fireside chats, President Trump put the tool to work. He signed an order that authorized me as USTR to begin an investigation of China’s practices on forced technology transfers, intellectual property protection, and cyber theft. The seven-month investigation was conducted by USTR staff with support from across the federal government and concluded with the release on March 22, 2018, of a historic 200-page report carefully demonstrating the many abuses in China’s technology transfer regime, its licensing restrictions for U.S. businesses, its state-sponsored investments to acquire U.S. technologies, and its repeated attacks on our commercial computer networks.

Less than two weeks later, on April 3, we announced $50 billion worth of Chinese imports that would be subject to 25% tariffs pursuant to the Section 301 action. Sectors including aerospace, information and communication technology, robotics, and machinery were selected through an extensive interagency economic analysis with the goal of having those goods that benefited from China’s policies pay the price. Within a day, China retaliated with a list of $50 billion of U.S. imports that would be subject to 25% tariffs.

While Steven Mnuchin, Secretary of the Treasury, wanted to find a negotiated solution to prevent the 25% tariffs from taking effect, I firmly believed that the tariffs were a necessary, appropriate, and measured step. The president was on my side and constantly resolute. Secretary Mnuchin and I sent a letter to Chinese Vice Premier Liu He on April 20, setting forth the broad outlines of an agreement to resolve outstanding issues between our two countries. We also agreed to travel to Beijing for talks.

Vice Premier Liu would be my counterpart for the remainder of the Trump administration. He had earned degrees in economics from Renmin University, China’s most prestigious in that field, and also a master’s degree in public policy from Harvard University. He handled difficult situations well and could argue his position without relying on talking points. He and his immediate team understood the issues. They spoke English and were familiar with Western history and philosophy. He proved to be a tough and very smart negotiator but always an honorable man. I came to admire him.

On May 3 and 4 in Beijing, Vice Premier Liu’s delegation met with ours, which consisted of myself, Secretary Mnuchin, Secretary Wilbur Ross, Larry Kudlow, and Peter Navarro; Mnuchin was the designated lead. China tested our group’s mettle and unity by proposing an “early harvest agreement”—that is, a partial agreement that would relieve pressure on the Chinese and lift some of the tariffs. This would be like the dialogues of the past where they strung us along. Peter Navarro and I strongly opposed any early harvest. We thought it would reduce our leverage and make it much harder to make any real progress.

Later in May, the vice premier and his delegation came to Washington for three days of meetings. Once again, the Chinese pursued an early harvest deal addressing purchases and issues on which China had previously made and failed to fulfill commitments. Secretary Mnuchin continued ostensibly to serve as the lead for our side, but he was less concerned with structural issues causing the distortions and unsustainable imbalance in our trade relationship with China. I had to fight to keep the focus on the major structural issues and not have our side settle on an agreement covering some “old wine in new bottles” and a commitment to purchase more U.S. exports.

The fact that we had not reached any type of real agreement was fine with me. In fact, I was thrilled that there was no deal that would prevent us from moving forward with the tariffs.

At the conclusion of the meetings in Washington, on May 19, the two sides issued a joint statement that was short on specific commitments and focused far more than I would have preferred on purchases. It provided that “China will significantly increase purchases of United States goods and services” and that the two sides “agreed on meaningful increases in United States agriculture and energy exports.” The fact that we had not reached any type of real agreement was fine with me. In fact, I was thrilled that there was no deal that would prevent us from moving forward with the tariffs.

Secretary Mnuchin had a different take. He went on one of the Sunday talk shows and claimed that the tariffs were “on hold.” I spoke to the president, who was in his White House residence, over the phone, to emphasize that staying on track with the imposition of the tariffs was the only way to gain the leverage necessary to get a good deal with the Chinese. He was completely supportive. I released a statement indicating that “the United States may use all of its legal tools to protect our technology through tariffs, investment restrictions and export regulations.” I added, “Real structural change is necessary. Nothing less than the future of tens of millions of American jobs is at stake.” And on May 29, the White House released a statement saying that we would impose tariffs on $50 billion in goods from China in June.

On June 15, incorporating public comments on how best to minimize the pain felt by U.S. companies and consumers while most directly targeting China’s “Made in China 2025” industrial policy, we announced the final list of products—two lists, actually, that would be subject to the tariffs beginning at different times. “List 1” covered $34 billion of Chinese products; “List 2” covered an additional $16 billion. We had shown restraint in imposing tariffs on only $50 billion of China’s imports, but no administration had ever stood up to them before, and I’m sure they were confident that we would back down. I always assumed that all the lobbyists and former government officials opposing our actions believed this, too. Thus, rather than address any of our concerns, China immediately published its own two-phase list of retaliatory tariffs.

They had not faced Trump and this new team, so they didn’t fully know who they were dealing with. It was one of many serious miscalculations the Chinese would make in our trade dispute. On June 18, as a response to China’s failure to change its unfair trade practices and its decision instead to pursue unlawful retaliation that could result in additional harm to the U.S. economy, the president directed me to identify another $200 billion worth of Chinese goods (“List 3”) on which to impose a 10% tariff. These numbers were far from arbitrary. We had taken the position that the initial $50 billion figure was roughly comparable to the costs that China’s unfair practices imposed on our economy. Now, China’s $50 billion in retaliatory tariffs covered 40% of our total exports to them. Our $200 billion in new tariffs would in turn cover 40% of their $500 billion in exports to us.

The Chinese had overplayed their hand, and we were using the imbalanced trading relationship that they had created against them.

Our first 25% tariffs went into effect on July 6 for the $34 billion of Chinese goods on List 1 and then on August 23 for the $16 billion on List 2. Each time, China’s retaliation of 25% tariffs on the same value of U.S. goods became effective the same day. Thus far, the Chinese had been matching us dollar for dollar with their retaliatory tariffs. But they had a problem: tariffs on the $200 billion of additional Chinese goods on List 3 were on the way; they only had about $60 billion in U.S. goods left to hit. The Chinese had overplayed their hand, and we were using the imbalanced trading relationship that they had created against them. In response to our proposed tariffs on $200 billion of additional Chinese goods, China announced its intent to impose tariffs on the remaining $60 billion of U.S. goods. They were out of ammunition.

With China still refusing to change its harmful behavior, and given its ongoing illegal retaliation, the president directed USTR to consider increasing the proposed tariff on the next $200 billion of List 3 Chinese goods from 10% to 25%. We decided to move forward with the 10% tariff on September 24 and announce a planned increase to 25% on January 1, 2019, which would give us additional leverage in the negotiations.

The looming deadline had its desired effect and China finally began discussing the structural issues that we had been raising regarding forced technology transfer, intellectual property, non-tariff barriers, services market access, and agricultural market access. China identified 142 separate issues that we had raised and, in early November, they presented a series of non-papers (unofficial diplomatic notes) sorting the issues into three categories: “green light” issues on which they believed we could reach agreement if we “met each other halfway,” “yellow light” issues on which they believed we could have “in-depth discussions” and potentially reach agreement, and “red light” issues where they believed no agreement would be possible.

As the Chinese peppered us with additional non-papers explaining their classification of each issue, it became clear that they continued to misjudge our side and overplay their hand. They believed we could reach agreement on the “green light” issues only because they thought that actions China had already taken or was planning to take would be sufficient. We had to explain repeatedly that if the actions China had taken or was planning to take were sufficient, we would not be raising the issues with them in the first place. In addition, China classified the most important issues as “red light” ones, which ensured that no progress could be made.

The Chinese still wanted a deal focused on increasing purchases of U.S. goods. Their proposal seemed unrealistic, unenforceable, and insufficient.

One month before the List 3 deadline, on December 1, President Trump and President Xi met at the G20 summit in Buenos Aires for a working dinner. In addition to the president, the U.S. delegation for the meeting included Secretary Mnuchin, Secretary of State Mike Pompeo, National Security Advisor John Bolton, Peter Navarro, Jared Kushner, Larry Kudlow, and me. By now the president had decided that I should head the U.S. delegation in the negotiations. Secretary Mnuchin and I had met with Vice Premier Liu the prior day to review the latest numbers, a framework and agenda for the meeting, and potential outcomes. The Chinese still wanted a deal focused on increasing purchases of U.S. goods. Their proposal seemed unrealistic, unenforceable, and insufficient.

The dinner lasted about two-and-a-half hours. It began with President Xi making a long, prepared statement mostly focused on trade. He also addressed the Chinese government preventing certain dual Chinese-U.S. citizens from leaving China, fentanyl, and North Korea. President Trump then made his own statement, cordial but businesslike. On trade, President Trump provided an overview of our concerns and then turned it over to me. While respectful in addressing President Xi and his senior delegation, I provided a blunt and frank assessment of where we were in our dispute: the massive distortions in the trade relationship caused by China’s unfair trade practices; the egregious harm that our workers, farmers, manufacturers, and other businesses had suffered as a result; and the absence of progress on these matters over the years of our talks.

Coming into the dinner, we had all known that China would seek a removal of the tariffs we had imposed, or at least the tariffs on $200 billion of List 3 Chinese goods, so it was no surprise when China made this request. To address our concern about the enormous trade imbalance between our two countries, President Xi offered to have China increase purchases of U.S. goods and services by $1.2 trillion over six years. I had met previously with the president to explain why purchases were inadequate, the importance of focusing on structural issues, and the need to maintain tariffs already in place until structural issues were resolved.

As he so often did during these times, the president held firm. The tariffs stayed. We did agree to postpone the tariff increase scheduled for January 1, 2019 until March 1, while China committed to a substantial increase in the purchase of additional U.S. goods and services of all types and, most importantly, to begin immediately with negotiations on the full range of structural issues. If no agreement was reached on these issues by March 1, we would raise the List 3 tariffs from 10% to 25%. In other words, we had 90 days.

Stalemate

As I recounted, Confucius said, “In the past, when I evaluated a person, I believed what they said. Now, when I evaluate a person, I listen to them and then I see what they do.”

After a series of preliminary discussions, we held the first formal principal-level meetings on January 30 and 31, 2019. The U.S. delegation included me, Secretary Mnuchin, Secretary Ross, Peter Navarro, and Larry Kudlow. In my opening statement, I once again highlighted certain key themes and offered a quote from Confucius that I thought was particularly apt for our talks. As I recounted, Confucius said, “In the past, when I evaluated a person, I believed what they said. Now, when I evaluate a person, I listen to them and then I see what they do.” This was critical for us, I explained; we had to have a strong and clear path for enforcement in any agreement we reached. 

Vice Premier Liu and I spent most of our time over the next two days discussing forced technology transfer, intellectual property, and enforcement. I raised China’s joint venture requirements, ownership restrictions, and administrative licensing and approval processes that pressured U.S. companies to transfer their technology to Chinese companies. I also addressed China’s discriminatory intellectual property licensing regulations and its state-led investment in high-tech sectors. While we made some progress in these areas, issues such as state-sponsored cyber intrusions and cyber theft proved more difficult.

On enforcement, Vice Premier Liu seemed to understand our concerns, but his first suggestion was unsatisfactory. He provided a rough outline for an enforcement process that relied heavily on discussions between the parties. In response, I told him that while process and discussions were important, the two keys to any mechanism would be who determines whether there is a breach of the agreement and what the consequences are when there is a breach. When the vice premier suggested the use of a dispute settlement panel process such as that provided for under the United States–Mexico–Canada Agreement (USMCA), I was quick to note that the United States would want, at least in certain cases, to make its own decision on compliance and remedies, rather than have those decisions made by a panel. It seemed impossible that truly neutral Chinese arbitrators could be found, and the idea of using third-country judges was out of the question for both the United States and China.

It was important for us that we see some evidence of China’s good-faith intent to actually implement suggested changes, given their history of reneging on commitments. We were giving them an opportunity to prove it.

Toward the end of the meetings on January 31, we submitted a list of actions that could and, we believed, should be taken immediately by China. It was important for us that we see some evidence of China’s good-faith intent to actually implement suggested changes, given their history of reneging on commitments. We were giving them an opportunity to prove it. These immediate actions ranged from China lifting its foreign investment restrictions to eliminating its discriminatory intellectual property licensing regulations to granting approvals for U.S. companies seeking to provide credit rating, electronic payment, and insurance services in China. Vice Premier Liu responded favorably to certain of these items but said China would respond formally at a later date.

On February 8, we delivered three memorandums of understanding (MOUs) to the Chinese side, covering forced technology transfer, intellectual property, and agricultural barriers and market access. It quickly became clear that there was backsliding by China in a number of areas from where we had been in our meetings in Washington. This was a major problem and exactly where I started in our next principal-level meeting. I expressed that we had great confidence in Vice Premier Liu but that we were discouraged by China’s backsliding. Noting China’s history of unkept promises, I emphasized the great risk if we reverted to prior failed efforts. The vice premier assured us that this time was different and that the Chinese would do everything that he promised without any changes. Unfortunately, issues with backsliding by China would be a recurring theme.

Although I could not definitively know what was going on behind the scenes in China, I was sure that Vice Premier Liu was dealing with multiple, interrelated tensions within the Chinese political system as he syndicated our proposed agreements. Beyond pushback from Chinese Communist Party (CCP) hardliners, who opposed market-oriented reforms or concessions to American demands instinctively, he also faced tensions from China’s entrenched administrative bureaucracy, which feared losing control and discretion over important policy areas. He also had to navigate long-standing divisions between the provincial and national governments in China, as many provincial leaders staunchly opposed concessions by the national government that would limit their ability to control local economic policy. Finally, he faced difficulties when agreeing to changes to policy areas outside of his direct portfolio of responsibilities separate from his (temporary) role as the chief negotiator—we often saw that the negotiations were most productive when discussing matters that the vice premier could implement himself. The vice premier surely kept President Xi continuously apprised of our discussions, but negotiated concessions continually disappeared or reemerged in watered-down form as the details spread to different interest groups within the Chinese government and Chinese leaders responded to consequent internal pressures.

[N]egotiated concessions continually disappeared or reemerged in watered-down form as the details spread to different interest groups within the Chinese government and Chinese leaders responded to consequent internal pressures.

Our discussions then moved to areas that we had not reached in our meetings in Washington, such as barriers to services and agriculture trade and, importantly, China’s massive subsidies that provide an unfair advantage to its own companies, its enormous excess capacity in industries such as steel and aluminum, needed disciplines on its State-Owned Enterprises (SOEs), its “secure and controllable” policies for information and communication technology, and the use of its anti-monopoly law. Vice Premier Liu recognized the importance of eliminating subsidies and excess capacity and sought only to carve out subsidies for laid-off employees. He also expressed openness to strong disciplines on SOEs and to SOE reform, which was another area within his portfolio.

On the evening of February 14, we had dinner at the Beijing Hotel with the Chinese delegation. The Beijing Hotel had great symbolic significance for relations between the United States and China because it served as one of the locations where Henry Kissinger and Zhou Enlai met in 1971 before President Nixon’s visit to China the following year. The hotel overlooks the Forbidden City and has views of Tiananmen Square. At the conclusion of this trip to Beijing, Secretary Mnuchin and I and a few other members of our delegation were invited to meet with President Xi in the Great Hall of the People.

Unfortunately, when we hosted the next set of meetings in Washington on February 21, the Chinese side attempted to change language in the MOUs that represented commitments made by Vice Premier Liu in Beijing. This backtracking necessitated that I go through each of the MOUs with the vice premier, provision by provision, to nail down the language. In doing so, I had to explain the basis and justification for each of the provisions and the language used. It was again clear what was happening. The vice premier would act in good faith in our talks, but when word got back to other power sources in Beijing, there would be blowback.

Although the process of going through each provision line by line required much time and painstaking effort, it was essential and resulted in our making a great deal of headway. To take advantage of the momentum, we extended the two-day talks through the weekend. Key progress was made on issues across the MOUs on forced technology transfer, intellectual property, non-tariff measures, services, agriculture, and currency. Even on seemingly intractable problems such as industrial subsidies, excess capacity, and SOEs, China was willing to agree to critical disciplines. We had a lengthy discussion on what would happen with the tariffs if we were to reach an agreement. I explained that the 25% tariffs on the $50 billion of List 1 and 2 Chinese goods would remain in effect for the long term and that the 10% tariffs on the $200 billion of List 3 Chinese goods would remain in effect initially but could be reduced over time as China implemented its commitments under the agreement. It was clear that the removal of the tariffs represented a core issue for China.

President Trump was a hands-on boss. He was constantly involved in the details of our negotiations. For me that was a great way to work. I always knew I was precisely representing his position and that he would back me up.

After the conclusion of our meetings on February 24, Secretary Mnuchin and I briefed the president in detail on the status of the talks. President Trump was a hands-on boss. He was constantly involved in the details of our negotiations. For me that was a great way to work. I always knew I was precisely representing his position and that he would back me up.Given the progress we had made, the president decided to postpone the tariff increase on the $200 billion of List 3 Chinese goods scheduled for March 1. We would have more time to talk.

At this point in the negotiations, there were regular, ongoing exchanges of text between the parties. Despite the substantial progress in our meetings in Washington, the consensus we reached on a number of key issues was not reflected in the text we received from China. For issues on which we thought we had reached agreement, it started to appear as though we had not. Further, China tried to bilateralize commitments to make them applicable to both the United States and China where it was not possible or appropriate to do so, including for China-specific issues. In some cases, as in the intellectual property and agriculture chapters, China sent us entirely new, U.S.-only commitments. Once again, I suspected the Chinese hawks and bureaucrats were undercutting their negotiator.

I had no interest in any kind of ambiguity—constructive or otherwise.

On March 6, we had the first of a series of conference calls with Vice Premier Liu and his team. At one point, he suggested that we could follow the approach of the Shanghai CommuniquĂ©, the famous document issued by the United States and China during President Nixon’s visit to China in 1972 to normalize relations. The Shanghai CommuniquĂ© reviewed the differences between the two countries and then expressed their mutual interests. It used what is called “constructive ambiguity.” This was not the first—and would not be the last—time that the Chinese mentioned following this approach. I rejected this idea. I had no interest in any kind of ambiguity—constructive or otherwise.

Over the course of these calls, the negotiations had progressed sufficiently that we talked at various times about a potential meeting or telephone call between President Trump and President Xi to conclude an agreement. We continued to discuss the language of the agreement line by line—my negotiation binders were beginning to have more lines and written notes in multicolor than print on the pages.

We held meetings in Beijing on March 28 and in Washington the following week, which represented the eighth and ninth rounds of negotiations. We continued to make steady progress on the text in a series of conference calls throughout the month of April and then met in Beijing on April 30. At this point I conveyed that we had this round and the next round to complete the agreement and that we needed to decide whether or not we would have a deal. If not, President Trump would move forward with additional tariffs on Chinese goods.

What we heard from Vice Premier Liu was highly discouraging. He explained that the Chinese needed the complete removal of all tariffs and additional changes to the structure of the text to make it more balanced. But even more significantly and troublingly, the political leadership in China had strong objections to specific structural changes provided for in the agreed text. They contended that it would look as if China’s sovereignty and dignity were being undermined and as if the United States were imposing another unfair treaty on China.

I explained that we were very much aware of the history of unfair agreements for China, including those from the Opium Wars through the Japanese occupation of China. But this situation, I argued, was the exact opposite. How could China feel aggrieved when it had accumulated over a trillion dollars in trade surpluses with us? We had already made changes where we could to make the text look more balanced. We needed specific and enforceable commitments by China to make structural changes to ensure that the agreement had support and sustainability. That was the only way the president would ever agree or that I could convince people in the United States that this agreement was different than the agreements China had failed to fulfill in the past.

The language we were discussing had been agreed upon for weeks or months. We were devolving rather than evolving. I huddled with Secretary Mnuchin and my deputy, Ambassador Jeffrey Gerrish, to confirm that they shared my views of the significance of China’s proposed changes and its movement backward. In a private session with the vice premier, Secretary Mnuchin and I asked that the Chinese side send us their revisions to one of the chapters of the agreement, which we believed would be the intellectual property chapter, to show us an example of the changes they sought. We left Beijing disappointed.

When we received the revised text of the intellectual property chapter later that week, it confirmed our worst fears. The document was a sea of redlines. China struck out major portions of agreed-upon text covering important specific commitments, unquestionably reneging on its commitments. Over the weekend, Secretary Mnuchin and I briefed the president on China’s actions. The president issued a tweet on May 5 indicating that the tariffs on the $200 billion of List 3 Chinese goods would increase from 10% to 25% and that the remaining Chinese imports not already covered by tariffs could face 25% tariffs. Showing the unity across diverse viewpoints within the administration, Secretary Mnuchin and I briefed the press the following day together with Larry Kudlow and Peter Navarro. 

Tensions escalated quickly. On May 10, we increased the tariffs from 10 percent to 25 percent on the $200 billion of List 3 Chinese imports and began the process for raising tariffs on essentially all remaining imports from China, which were valued at approximately $300 billion (“List 4”). China announced that it would increase tariff rates on the $60 billion of U.S. goods that it had not yet hit. Days later, the U.S. Department of Commerce placed Chinese tech giant Huawei and 68 of its affiliates on its Entity List, effectively cutting those companies off from exports of sensitive U.S. technology. Not to be outdone, China reported that it was working to establish an “Unreliable Entities List” of banned U.S. companies.

We were now two years into this effort to rebalance our relationship with China, and it was apparent that China’s leadership had no intentions of changing.

We were now two years into this effort to rebalance our relationship with China, and it was apparent that China’s leadership had no intentions of changing. At least the tariffs were in place. They would have the effect of counteracting China’s unfair trading practices, putting economic pressure on the Chinese government to make a deal, and in the meantime discouraging U.S. corporate investment in and supply chain integration with China.

We had confirmed that while individual Chinese officials may act in good faith, the hard-liners held more power back home. Painstaking work through details may be the way to get initial commitments, but would they be worth anything? What we’d need to find was a way to make those commitments enforceable. As the tariffs went into effect, it was time to have another serious meeting, one where the president would step in personally.

End Game

In June 2019, it was announced that President Trump would meet President Xi at the end of the month on the sidelines of yet another G20 meeting, this one in Osaka, Japan. Once again, I made the trip with President Trump and attended the meeting with President Xi on June 29. Considering all that had happened, I thought the meeting was friendly and productive. While the current tariffs remained in place, the two sides agreed not to escalate further and to resume negotiations. In addition, President Xi agreed that China would immediately begin making significant new purchases of U.S. agricultural products.

Wasting no time after the meeting in Osaka, we had conference calls with Vice Premier Liu on July 9 and July 18. Joining him for the first time on these calls was the Chinese minister of commerce, Zhong Shan. Minister Zhong was viewed as a hardliner whose participation in the discussions could impede progress. The vice premier raised two issues unrelated to our trade talks. One was arms sales that the United States had made to Taiwan. The other was the treatment of Huawei by the United States. The Chinese regularly raised issues unconnected to our trade negotiations that their officials viewed as affecting the “atmosphere” for the talks.

In contrast, an issue that clearly was related to our trade talks and that was essential to keeping them on track was President Xi’s agreement at Osaka to make immediate and significant purchases of U.S. agricultural products. When I raised that commitment, the vice premier surprisingly indicated that President Xi had only agreed that the two sides could have talks on possible agricultural purchases. He also offered several reasons why additional agricultural purchases may not be possible, including the continuation of the tariffs on Chinese goods. To avoid any possible confusion, I stressed in the strongest possible terms the urgency of the situation and that we understood President Xi to have agreed to proceed immediately with increased agricultural purchases. In our call on July 18, the vice premier stated that China would make agricultural purchases starting the next day.

Structural issues were more important than purchases in the long run, but the purchases were a vital test of good faith and enforcement, and the Chinese were failing it.

We agreed to conduct our next face-to-face meetings in Shanghai on July 30 and 31, but by then had a serious problem. China was not following through on making immediate and substantial agricultural purchases, repeating a pattern of unfulfilled commitments to such purchases throughout the negotiations. Structural issues were more important than purchases in the long run, but the purchases were a vital test of good faith and enforcement, and the Chinese were failing it. Despite our efforts to convey the urgency of the situation to the vice premier, we received a lukewarm response.

After we briefed the president upon our return from Shanghai, he directed me to move forward with imposing 10% tariffs on the remaining Chinese imports not already subject to tariffs starting on September 1. These were the so-called List 4 tariffs and would be in addition to the 25% tariffs then in place on $250 billion worth of Chinese imports from the first three lists. We soon received requests from U.S. companies to delay at least part of the tariffs because of the impact they would have on those companies and American consumers during the holiday season. List 4 included more consumer goods, such as clothing, footwear, laptop computers, and video game consoles. Considering our goal throughout this process of minimizing the pain on U.S. parties, we decided to delay the tariffs on $160 billion of the $280 billion in remaining Chinese imports until December 15. Thus, new tariffs would go into effect on September 1 for $120 billion in Chinese imports (“List 4A”) and on December 15 for the other $160 billion in Chinese imports (“List 4B”).

China announced its retaliation in the form of additional tariffs on $75 billion of U.S. goods on August 23. Once more, China had miscalculated. They had never been up against a president as tough as President Trump. He followed the negotiations, he knew the issues, and he was determined to correct the relationship. China still had not addressed the unfair trade practices identified in the Section 301 report and instead chose yet again to retaliate against the United States to protect and defend those practices. In the process, it tried to inflict more harm on the U.S. economy. As a result, the president directed me to again increase the tariffs—this time on the Chinese goods in Lists 4A and 4B from 10% to 15% and on the $250 billion of Lists 1, 2, and 3 Chinese goods from 25% to 30%, starting on October 1. On September 1, the 15% tariffs on the $120 billion of List 4A Chinese goods went into effect.

On a September 4 call with Vice Premier Liu and his team, I proposed meetings at the deputy level during the week of September 16, exchanges of text before and after those meetings, and a principal-level meeting in early October. In those September discussions, it became increasingly clear that certain subject areas might have greater prospects for agreement than others, including forced technology transfer, intellectual property, financial services barriers and market access, agricultural barriers and market access, and purchases.

As we entered October 2019, it appeared that we were building momentum. However, we had been in this situation before, only to see things break down. On October 10, the first day of the principal-level meetings, we started with a discussion of enforcement. We revisited the fundamental issue of who decides whether there has been a violation of the agreement and what action may be taken in response to that violation. Once again, I asserted our position that it should be the aggrieved or complaining party who decides those issues. We did not want to have panels of arbitrators from other countries make the decisions. We made significant headway on the intellectual property, forced technology transfer, agricultural barriers, market access, currency and enforcement chapters. China continued to raise its own issues, some of which were new and some of which related to areas outside of our trade discussions. The vice premier also continued to insist on the removal of all tariffs as a bottom-line position. We did not engage on these issues.

Because we would keep the tariffs in place throughout the talks on the later parts, the United States maintained its leverage.

Although President Trump and I previously had not wanted to do a phased agreement, it had become apparent that a comprehensive agreement covering the breadth and depth of all the issues we had been discussing with China would not be possible in the near term. We briefed the president and decided to do the agreement in phases, with the first phase covering the areas on which we had made substantial progress in our meetings and a second and possibly third phase to cover the other areas. Because we would keep the tariffs in place throughout the talks on the later parts, the United States maintained its leverage.

On October 11, the president met with the vice premier in the Oval Office and announced that we had reached an agreement in principle on a Phase One trade deal that would require China to make important structural changes in the areas of intellectual property, forced technology transfer, agriculture, services, and currency. The deal also would require China to significantly increase its purchases of U.S. manufactured goods, agricultural goods, energy, and services. We announced a final agreement on December 13.

Chess and Checkers

Most observers thought that the announcement of the agreement meant we were done. However, an entirely new negotiation was about to start—the negotiation over the translation of the English text into the Chinese text. At times, this negotiation would prove nearly as intense and challenging as the negotiation over the original text, and it lasted until the early morning hours of the day the agreement was to be signed.

Although there were extensive battles over the translations of various terms, the most difficult fight was over whether the term “ying” or “jiang” should be used as the Chinese translation for “shall.” Our Chinese-language experts at USTR insisted that “ying” was the appropriate Chinese term to use for “shall” because it represented an obligation, whereas “jiang” represented the future tense relating to something a party merely planned to do in the future. However, the Chinese side vehemently disagreed, arguing that the use of “ying” was inappropriate and even insulting.

We consulted outside Chinese-language experts, including one who had worked on important agreements with China over several decades while serving with the U.S. embassy in Beijing. They all confirmed that if we wanted the term to convey an obligation, we should continue to insist on using “ying.” After several conference calls between Ambassador Gerrish and Vice Minister Liao on this issue, the Chinese finally relented and agreed to use “ying.” 

As we went through this “ying versus jiang” discussion internally at USTR, I asked my staff to bring me the famous cyber-intrusion agreement that President Obama had made with President Xi. I wanted to see which Chinese word that agreement had used. After some delay and checking around the government, my staff discovered that neither word had been used in Obama’s agreement. That was because the agreement had never been written down. There had not even been a joint press release agreed to. This vaunted “agreement” was nothing but a U.S. press release.

I realized again why the Chinese side was so surprised by our approach. They were used to dealing with Americans who were more interested in a show than actual enforceable agreements.

I realized again why the Chinese side was so surprised by our approach. They were used to dealing with Americans who were more interested in a show than actual enforceable agreements.

On January 15, 2020, President Trump and Vice Premier Liu signed the Phase One Agreement. Many critics quickly jumped to the conclusion without reading the agreement that it was merely a purchases deal that did not address significant issues. They could not have been more wrong.

The deal most importantly kept the tariffs in place. This fundamentally changed our economic relationship. Further, China agreed to make significant and systemic changes to protect intellectual property, to stop forced technology transfers, and to facilitate U.S. market access in agriculture and financial services. It undertook obligations not to manipulate its currency. And uniquely, this agreement was fully enforceable.

These negotiations were historic. This was the first time that a U.S. president had directly challenged China, or directly challenged the free-trade consensus to protect our workers. No sensible person thought the Phase One deal would be the final stroke in rebalancing trade with China, the coup de grace in our all-important competition with this adversary. Rather, it was a monumental course correction toward mitigating an existential threat—to quote Winston Churchill in 1942, “the end of the beginning” of strategic decoupling, if fully enforced. What is needed now are restrictions on investment in both directions, a concerted effort to disentangle technology, and more tariffs to assure balanced trade.

Robert Lighthizer
Amb. Robert Lighthizer is the former U.S. Trade Representative in the Trump administration and deputy trade representative in the Reagan administration.
Recommended Reading
The Case for a Hard Break With China

In Foreign Affairs, Oren Cass and Gabriela Rodriguez make the case for why economic de-risking is ot Enough

Policy Brief: End “Permanent Normal Trade Relations” with China

Reclaiming control of U.S. trade policy

Bad Trade

“Bad competitiveness” results in weakening demand, which either reduces global production or requires surging debt to maintain demand and production at its existing level. Perhaps that rings a bell, because it is the world we live in.