US review of China trade deal to add to Xi-Trump tensions

Five years after Xi Jinping struck his first trade deal with Donald Trump, U.S. officials are set to deliver their view of Beijing’s compliance with that bargain, in a high-stakes week likely to fan tensions.

American officials have until Tuesday to submit a two-month investigation into the “Phase One” deal that committed China to buying an extra $200 billion worth of U.S. goods, a goal official data shows it missed. Trade chiefs will also assess other bilateral issues including whether the U.S. should revoke China’s normal trade status — a move economists have called equivalent to a 30% tariff.

The America First Trade Policy review Trump ordered on Day 1 of his second term could become a starting point for talks about the future of a trade relationship worth $690 billion last year. It isn’t clear if U.S. officials will publish their findings online, or instead present them privately to the White House, with recommendations feeding into future tariff and other policy decisions.

“Trump will likely wield the review like holding an ax in his hand,” said He Weiwen, a former commercial counselor at Chinese diplomatic missions in New York and San Francisco. “He’ll use the review results as a threat to impose more tariffs on China.” If the U.S. revokes China’s permanent normal trade status, he added, that’ll be “enough to kill trade.”

The review is just one of several decisions looming that could shape U.S.-China relations.

Just 24 hours after the report is due — on what he’s billed “Liberation Day” — Trump is set to unleash plans for so-called reciprocal tariffs on U.S. partners, which will likely include China. On Saturday, a deadline drops for Chinese tech firm ByteDance Ltd. to reach an agreement on divesting video platform TikTok to an American firm over national security concerns, after Trump dangled the option of lowering tariffs to win Beijing’s support for such a deal.

“This might well prove the most important week for U.S.-China relations since Trump took office,” said Christopher Beddor, deputy China research director at Gavekal Dragonomics in Hong Kong. “Our base case is this eventually ends with a cosmetic deal that looks more like a ceasefire than a grand bargain.”

Negotiations between Beijing and Washington have been stalled at lower levels. Despite Trump repeatedly showing a willingness to talk, Xi hasn’t spoken with his U.S. counterpart and Beijing has slammed US officials’ claims that it isn’t doing enough to eliminate fentanyl smuggling — the issue Trump has cited for twice hiking blanket tariffs on China.

The wrangling ahead is likely to include the spat over a Hong Kong conglomerate’s plan to sell its Panama ports under pressure from the U.S., a move that’s got Beijing preparing to block new deals with the family of CK Hutchison Holdings Ltd.’s founder, Bloomberg reported. Such action could undercut Xi’s efforts to paint China as a stable partner, a message he stressed Friday in a rare meeting with global CEOs.

Another private company caught in the crossfire is ByteDance. Publicly known bidders for its platform TikTok, which Beijing values for its prized algorithm, include a group led by billionaire Frank McCourt and Reddit co-founder Alexis Ohanian. But it’s unclear who would be acceptable to the Chinese government, which needs to sign off on any deal.

Xi has told officials to “keep calm” as the trade war unfolds, with Beijing calibrating its tariff response with measured actions that avoid blowback on an economy already battling a property crash and deflation. That approach contrasts with Canada and the European Union, U.S. allies that have swung back with vows of retaliation against Trump tariffs.

Chinese officials warned U.S. trade chief Jamieson Greer on a call last week that Beijing will “resolutely retaliate” if Trump presses ahead with reciprocal measures. That sets the stage for tense conversations when senior officials travel to Washington for annual International Monetary Fund and World Bank meetings this month, giving them a chance for their first in-person talks with the Trump team.

Any talks will likely kick off a lengthy process. Negotiations stretched years in the first trade war, roiling financial markets and casting a cloud of uncertainty over investment decisions that hurt growth in both nations. The final deal committed China to a spending spree to try to close its trade imbalance with the U.S. — but that fell apart when the pandemic shortly after upended global trade.

The White House has already concluded China missed its obligations and believes punishment is needed, said Scott Kennedy, a China expert at the Washington-based Center for Strategic and International Studies. While U.S. officials “say they want a deal, they also might be comfortable with a substantial decoupling,” he added. “That would be bad for the American economy and for our national security.”

Another area the review will cover is currency manipulation. China has long been accused by U.S. politicians of keeping the yuan’s rate against the dollar artificially low to advantage its exporters. But as with tariffs, this time China won’t be the sole nation under scrutiny. The Treasury Department in November added South Korea to a “monitoring list” for foreign-exchange practices that includes China, Japan, Vietnam and Germany.

Once both sides finally get to the negotiating table, striking a deal will face new challenges: China’s years-long push to diversify its imports away from the U.S. and a cooling economy have left Xi with less room to maneuver.

Chinese scholars also say the U.S. expansion of tech controls under Joe Biden violated expectations of the Phase One deal, according to Martin Chorzempa, senior fellow at the Peterson Institute for International Economics in Washington.

“Much of what China might ask for from the U.S. side would be a relaxation of measures taken in the name of national security,” he added. For many in Trump’s administration, that’s something they “would be staunchly opposed to.”

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(With assistance from Catherine Lucey, James Mayger and Zheping Huang.)

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