By Bob Davis in Washington and Lingling Wei in Beijing
On Sept. 21, Chinese President Xi Jinping convened an emergency
meeting of two dozen top officials. The day before, the U.S. had
taken Beijing by surprise by imposing sanctions on a research unit
of the Chinese military, shortly after announcing tariffs on $200
billion in Chinese imports. The Chinese didn't know how to
respond.
Mr. Xi arranged the meeting so hastily that three of the seven
members of the group's Standing Committee -- China's final arbiter
of power -- couldn't attend because they were traveling, say
individuals with knowledge of the discussions.
The party members, who gathered at the Zhongnanhai leadership
compound in central Beijing, eventually concluded that a forceful
counter was essential. China canceled impending trade talks in
Washington, suspended a meeting with U.S. military officials and
summoned the U.S. ambassador in Beijing to complain.
"There was no point in talking when the entire atmosphere was so
poisonous," recalls a senior Chinese official. In an interview
Monday, President Trump responded: "I just want our country to be
treated fairly."
China and the U.S. are on the brink of a new Cold War, with
tensions over trade at the top of the agenda. Both are erecting
increasingly punitive tariff barriers on either side of the
Pacific, putting into play their reputations on the world stage and
the fate of major industries, from cars to cellphones to
agriculture.
That the two countries arrived at this point, despite years of
tension, wasn't inevitable. Rather, it played out this year in the
corridors of power in Washington and Beijing, with both maneuvering
-- and often miscalculating.
China's leaders misread Mr. Trump as a businessman first, rather
than the politician whose fixation on trade had helped carry him
into office. They mistook his Treasury secretary as the key
interlocutor, not the White House hard-liners who truly had his
ear. And they failed to recognize the growing resentments in the
U.S., and the world, about their own winner-take-all approach to
trade and economics.
The Trump administration, for its part, found that ratcheting up
pressure on China's leaders kept them off balance, but hasn't
persuaded them, thus far, to change their policies. Picking fights
with Europe, Japan and other allies over steel, aluminum and other
issues undermined Mr. Trump's ability to rally international
support. And strife between the moderates and hard-liners in his
own administration made it difficult for the U.S. to forge a
consistent strategy.
Messrs. Xi and Trump are preparing to meet in Buenos Aires on
Saturday as part of the Group-of-20 leaders summit. Both sides say
they want a new trade deal. Mr. Trump is pressing for concessions
that China is resisting.
This account is based on hundreds of interviews with government
and business officials in both countries, including some who
participated in internal discussions.
Economic relations between the two nations began souring long
before Mr. Trump became president.
After China joined the World Trade Organization in 2001, it
began amassing huge trade surpluses with the U.S. American
officials complained China didn't open its markets enough in
return. Under President Xi, Beijing increased the government's role
in the economy, supporting state-owned firms with loans from
government-run banks and increasing pressure on U.S. firms to hand
over their technology.
In February 2015, nearly half of the Western companies surveyed
by the American Chamber of Commerce in China felt they were less
welcome than a year earlier.
Cui Tiankai, China's ambassador to the U.S., blamed U.S.
companies for not adapting to China's increasingly competitive
marketplace. "Maybe the days of so-called easy money in China are
gone," he said.
The U.S. began taking a more confrontational approach to China
at the end of the Obama administration. Mr. Obama pressed Mr. Xi on
cybertheft and its military buildup in the South China Sea, and
negotiated a trade deal with other Asian nations to contain China
as a regional power.
Chinese leaders rejected U.S. complaints that it pressured U.S.
firms to hand over technology and denounced the U.S. for trying to
contain its rise. Under Mr. Xi's banner of China Dream, the
government rolled out domestic and foreign-policy initiatives that
challenged U.S. dominance, including a state-led effort to boost
high-tech industries and the "Belt and Road" program to project
economic influence across Eurasia and Africa.
'They listened very carefully'
Chinese officials thought it had sized up Mr. Trump: He was a
businessman and pragmatist, a deal maker with whom they could
negotiate. His family-run business empire looked familiar in a
region where family conglomerates were common. "He's
transactional," said one Chinese official earlier this year.
Mr. Trump had lashed out at China in his campaign, tapping into
resentment in manufacturing communities hit hard by imports.
Chinese leaders were inclined to discount such campaign
rhetoric.
Before his inauguration, Mr. Trump's campaign met with various
China experts, including Henry Kissinger, who then communicated
with Chinese officials.
"Everything is on the table," Mr. Kissinger told Chinese leaders
after he conferred with the president-elect -- a message that the
U.S. was open to negotiate on many issues, say Trump officials from
that time. Mr. Xi told Mr. Kissinger he wanted to meet Mr. Trump
one-on-one, laying the groundwork for a later summit at Mr. Trump's
Mar-a-Lago golf resort.
The atmosphere chilled in early December 2016, when Mr. Trump
took a phone call from Taiwan President Tsai Ing-wen. It was first
time in nearly four decades an incoming president had talked to the
leader of what Beijing considers a renegade province.
In discussions with the Chinese, the Trump team portrayed the
call as a mistake, a new administration learning the nuances of
foreign policy. After consulting again with Mr. Kissinger, Trump
officials decided not to meet with the Dalai Lama, the Tibetan
religious leader whom China views as an enemy. They also arranged a
meeting with Yang Jiechi, China's most senior foreign-policy
official.
In New York, Mr. Yang and Ambassador Cui lectured Trump
representatives that "the territorial integrity of China is not to
be questioned," says Steve Bannon, Mr. Trump's former chief
strategist, who attended the meeting.
Recalls Mr. Cui: "The Trump people at the time, they listened
very carefully to us."
Mr. Bannon, who sees China as an existential threat to the U.S.,
says he found the sessions "incredibly condescending."
Shortly afterward, Mr. Bannon put together a China strategy
group. Concerned that Chinese intelligence was monitoring Trump
Tower, the group didn't send drafts of their China report
electronically. They agreed the new administration should pressure
China on economic and security issues, while continuing high-level
contacts.
Early on, Mr. Trump's priority was getting help pressuring North
Korea to give up nuclear weapons. In an effort to woo China, he
broke his campaign pledge to label China a currency
manipulator.
"I was doing North Korea and I didn't want to let the
negotiations come in the way, " Mr. Trump said in the
interview.
In April 2017, Messrs. Trump and Xi met at Mar-a-Lago. The two
leaders announced a framework for a 100-day plan they said could
ease economic strains. Commerce Secretary Wilbur Ross would take
the lead negotiating for the U.S., and Wang Yang, then a vice
premier known for backing economic reform, would lead the Chinese
side.
That summer, Mr. Trump delayed announcing an investigation into
Chinese trade practices for fear of losing Chinese support on North
Korea, say administration officials. When he finally decided to
launch the investigation, they say, he didn't want to single out
China, even though the probe was aimed specifically at alleged
Chinese trade abuses.
"I don't want to target China," aides recall him saying. "Let's
leave China out of it."
In the White House ceremony announcing the investigation, Mr.
Trump mentioned China just once.
'They're playing you'
Central to the talks between Messrs. Ross and Wang were U.S.
complaints that inexpensive Chinese steel was flooding global
markets and putting U.S. steelworkers out of jobs. The motto of Mr.
Ross's negotiating team, says a former Trump official, was "no
steel, no deal."
After months of negotiations, say U.S. officials, Beijing agreed
to reduce production, as it had promised before, but at a faster
pace. Chinese officials considered offering to open markets further
to overseas financial firms, but decided against it, figuring they
had offered enough.
Back in Washington, Mr. Ross's package landed with a thud, seen
as little more than a repackaging of past unfulfilled promises.
Shortly before Mr. Ross was to meet Mr. Wang and other Chinese
officials for drinks to celebrate the deal, he met with Mr. Trump
in the Oval Office.
"Shut it down," the president told him about the talks.
Negotiations ended, as did Mr. Ross's role as top U.S.
representative, although an administration official says he remains
part of the China negotiating team. Mr. Wang was promoted to a
different position late that year.
To Mr. Trump and some advisers, the busted negotiation was
evidence Beijing wanted to hook the U.S. into endless talks that
led to few concrete results. To Beijing, it demonstrated the
difficulty of dealing with the new administration. Chinese
officials grilled foreign visitors about who really had Mr. Trump's
ear.
Four months later, when Mr. Trump flew to China for a state
visit, Mr. Xi personally guiding him and first lady Melania around
Beijing's Forbidden City. The charm offensive flopped.
Mr. Trump had chosen U.S. Trade Representative Robert Lighthizer
to present U.S. trade complaints to the Chinese leader. Mr.
Lighthizer, a former Ohio steel-industry lawyer who resented how
Chinese imports had battered his industrial clients, talked so
bluntly that some in Mr. Xi's entourage say they were offended. Mr.
Ross sat outside the meeting room, the Chinese noted, waiting to be
consulted.
Chinese officials wanted to use one of Mr. Trump's meetings at
the Great Hall of the People to offer foreign firms greater access
to China's banking, securities and insurance sectors. The U.S.
dismissed the idea as too little and too late.
"They're playing you," Mr. Lighthizer advised the president,
according to participants.
Hours after Air Force One took off from Beijing, China announced
the financial sector openings on its own. Beijing pledged to raise
to 51%, from 49%, how much ownership foreign firms could take in
Chinese securities ventures, among other things.
To date, no U.S. securities firm has received approval to expand
in China. That has become a talking point for trade hawks in the
administration who argue Beijing doesn't follow through on
promises.
'Bring me tariffs'
In early April, Mr. Trump threatened to levy his first major
round of tariffs on China, targeting $50 billion in imports.
Treasury Secretary Steven Mnuchin spoke by phone with China's Vice
Premier Liu He to arrange a meeting in Beijing. Mr. Mnuchin was
pushing for a deal while hawks in the Trump administration wanted a
tougher stance.
President Trump approved the trade mission, over Mr.
Lighthizer's opposition. As a compromise, the president filled out
the U.S. team with Mr. Lighthizer and White House trade adviser
Peter Navarro, whose book "Death by China" made him a reviled
figure in Beijing.
On the first day of talks, Mr. Lighthizer presented U.S. demands
in an eight-section document that called on China to reduce its
$375 billion trade surplus with the U.S. by $200 billion within two
years, to scrap policies and subsidies that supported favored
industries, and to pledge not to retaliate if the U.S. imposed
tariffs.
It was "surrender or die," says Erin Ennis, senior vice
president of the U.S.-China Business Council, a trade association
of large U.S. firms.
On the second day, divisions within Mr. Trump's team spilled
into the open.
Mr. Mnuchin, the head of the U.S. delegation, had arranged a
one-on-one sessions with Vice Premier Liu. Mr. Navarro confronted
the Treasury secretary on the lawn of the Diaoyutai State Guest
House, accusing him of a power grab. Confused Chinese officials
watched from a distance.
When Chinese officials turned to Mr. Lighthizer in subsequent
sessions, participants recall, he often replied, "I have nothing to
say." That led some in the two delegations to wonder whether he was
there to negotiate, or to watch over Mr. Mnuchin.
Internal U.S. squabbling continued on the Air Force jet carrying
the group home. During the flight, the White House released a terse
statement about "frank discussions" and the need for the team to
consult with Mr. Trump.
Messrs. Liu and Mr. Mnuchin met again a few weeks later publicly
declared a truce in May.
In White House meetings, Mr. Trump went the other way, say U.S.
officials, telling his advisers: "Bring me tariffs."
On June 15, the U.S. announced it would impose 25% tariffs on
$50 billion of Chinese goods, in two steps, mainly components and
industrial machinery. China said it would retaliate
dollar-for-dollar, hitting soybeans and other U.S. agriculture.
Three days later, Mr. Trump directed aides to identify more Chinese
goods for tariffs.
Mr. Liu's team spent the next few months analyzing the
eight-section U.S. document, categorizing its demands into 142
separate items, of which the Chinese said they would consider
negotiating 122. Mr. Liu delayed telling Washington what was on its
list or what it was willing to negotiate.
Warring camps
A pattern emerged. Mr. Trump threatened tariffs on Chinese
goods. Chinese and American negotiators huddled. Negotiations
failed. The U.S. imposed the tariffs -- now covering half of
China's $500 billion in U.S. imports -- and China, which imports
far less, retaliated.
Three men became key behind-the-scenes players: Mr. Liu for
China and Messrs. Lighthizer and Mnuchin for the U.S.
Mr. Liu, a 66-year-old economist, is one of four vice premiers.
He has known Mr. Xi since childhood. Earlier in his career, he
cemented his reputation in the West as a reformer when he met with
U.S. economists and told them the U.S. could pressure Beijing to
open its economy more. Now he is in charge of policy-making for the
Chinese economy, although U.S. negotiators wondered whether he had
the clout to push through changes.
Mr. Lighthizer appealed to the president's blue-collar leanings,
which led him to believe China had ripped off the U.S. and needed
to be punished. In White House meetings, Mr. Lighthizer sometimes
said Beijing was getting even for the Opium Wars between Britain
and China in the 1800s by shipping fentanyl to America. (China has
denied it is a major supplier.)
He saw tariffs not only as a tool for the trade battle, but also
to prod U.S. industries to shift investment away from China and
slow China's technological advance.
Mr. Mnuchin, a former Goldman Sachs Group Inc. executive, saw
himself as the administration's chief financial officer, with wide
latitude to take initiatives, allies say. That put him close to Mr.
Trump the businessman, who often telephoned CEOs who did business
in China -- Blackstone Group LP's Stephen Schwarzman and Wynn
Resorts founder Steve Wynn -- who urged him to cut a deal.
Mr. Mnuchin sought advice from his former Goldman boss, Hank
Paulson, a George W. Bush Treasury secretary who counted senior
Chinese leaders as friends. Mr. Paulson talked or met with Mr.
Mnuchin 11 times through March 31 of this year, according to
government calendars, but not once with Mr. Lighthizer. A Treasury
official says Mr. Mnuchin consulted Mr. Paulson on a variety of
subjects, including Treasury's role in setting China policy.
Time and again, Chinese officials turned to Mr. Mnuchin for a
path to Mr. Trump. Time and again, Mr. Lighthizer's views won
out.
'Serve as a bridge between our two governments'
Since the 1980s, China has counted on U.S. corporate leaders to
push back against pressure from Washington. Lobbying by executives
helped limit sanctions after the Tiananmen Square massacre in 1989
and to win support for China's WTO entry.
One of Mr. Xi's advisers, 70-year-old Wang Qishan, China's vice
president, considers himself an expert on the West. In the 1990s,
when he was head of the state-owned China Construction Bank, he
worked with Mr. Paulson. He tells visitors about his love of Mark
Twain and Jack London novels and the Netflix drama "House of
Cards."
When he met with U.S. executives in Beijing early this year, he
cited ancient Chinese military strategist Sun Tzu: "If you know the
enemy and yourself, you need not fear the result of a hundred
battles." China understood the U.S. better than the other way
around, Mr. Wang told them, and would be willing to endure far more
pain rather than concede.
That might have been a misjudgment. U.S. business groups, which
told the White House tariffs make it harder to do business, had
little impact on an administration that wanted U.S. companies to
pull up stakes in China. It had renegotiated the North American
Free Trade Agreement, in part, to make Mexico an investment
alternative.
Three big Washington trade groups that have led nearly every
free-trade battle in Washington -- the Business Roundtable, the
U.S. Chamber of Commerce and the National Association of
Manufacturers -- were now calling for changes in Chinese industrial
policies, fed up with alleged theft of the technology secrets.
China's Commerce ministry dispatched agents around the country
to quiz U.S. firms about their plans and to persuade them to stay
put. Changes were on the horizon, Beijing made clear, including
tariff cuts and reduced regulation. Officials emphasized easing
restrictions for foreign auto companies -- a promise Mr. Xi made in
April.
"All these things are what China has intended to do all along,"
says a senior policy maker in Beijing. "Trump helped speed things
up a bit."
In June, Mr. Xi gathered a group of 20 CEOs from foreign firms
such as Goldman Sachs and Hyatt Hotels Corp. to warn them they
could be caught in the crossfire of a trade war.
"In the West, you have the notion that if somebody hits you on
the left cheek, you turn the other cheek," he told the foreign
executives, according to people familiar with the session. "In our
culture we punch back."
At the end of the gathering, his frustration boiled over. "We
respect your democratic system," the Chinese leader said, according
to people familiar with the session. "Why can't you respect
ours?"
In August, China Vice Minister of Commerce Wang Shouwen flew to
Washington and met representatives of a dozen big U.S. companies.
"Serve as a bridge between our two governments instead of a wedge,"
he told them, according to participants. "You may have frustrations
and concerns, but I hope you won't exaggerate those issues."
Intel Corp. Vice President Peter Cleveland told Mr. Wang that
Intel was committed to China for the long term. But he urged China
to make some of the changes the U.S. sought, including easing
government pressure on U.S. firms to transfer technology to their
Chinese partners, according to people who attended the session.
International Business Machines Corp. Vice President Chris
Padilla told Mr. Wang that unless the trade fight ended, his
company would have to consider shifting its purchases elsewhere,
according to the people who attended. Once that started, it would
be tough to move it back.
IBM and Intel declined to comment.
'We are under no pressure to make a deal'
In Beijing, the government settled in for a long battle. China's
economy was slowing, which had the potential to stir resentment
against one-party rule and weaken the government's negotiating
position with the U.S.
Mr. Xi resisted making changes the U.S. demanded, including
reducing subsides to state firms and scaling back state-led
industrial policy. He traveled to the northeast, China's Rust Belt,
to call on the nation to become more self-reliant.
Chinese leaders made an effort to divide U.S. allies over the
trade issues, and met this year in Beijing with the leaders of the
European Union, France, Germany and Japan. The U.S., EU and Japan,
however, have been meeting to see whether they can build common
positions against Chinese subsidies and technology transfer, and to
press those issues at the WTO.
In late August, the U.S. held hearings on its plan to impose
tariffs of as much as 25% on $200 billion of Chinese goods, one of
the last steps before imposing the duties. Beijing pledged to match
U.S. tariffs, but couldn't equal that total. China imported $130
billion in goods from the U.S., and needed U.S. semiconductors and
software.
Chinese leaders again decided to seek a settlement. Encouraged
by Blackstone's Mr. Schwarzman, they requested a meeting with Mr.
Mnuchin, offering to send Mr. Liu -- once again -- to
Washington.
As part of the diplomatic minuet of arranging such sessions, the
Chinese side wanted to be invited. In an Oval Office session in
September, Mr. Trump dictated to the Treasury secretary how such a
letter should read.
Shortly before midnight on Sept. 12, the Journal reported the
U.S. had invited Mr. Liu. A few hours later, China's foreign
ministry confirmed the invite.
The report infuriated the president, his aides say, because it
appeared he was asking for the meeting, and was weak. At 7:15 the
next morning, Mr. Trump tweeted: "The Wall Street Journal has it
wrong, we are under no pressure to make a deal with China."
Plans for the meeting started unraveling, officials from both
countries say. "I don't really care" whether the Chinese come, Mr.
Trump said in meetings with his trade advisers.
Mr. Trump said in the interview he disagreed with Mr. Mnuchin on
the prospects for a settlement. The Chinese "were not ready to make
a deal," he said.
He did accept a proposal by Mr. Mnuchin to limit new tariffs to
10% through the end of the year, before jumping to 25%, the rate
the U.S. had already imposed on other goods. That would limit the
impact on U.S. retailers before Christmas, Mr. Mnuchin argued, and
would set a new deadline that could prompt fresh talks.
On Sept. 17, a week before Mr. Liu was scheduled to arrive in
Washington, the White House announced the tariffs. That surprised
the Chinese, who had thought Washington would delay the decision
until after the talks.
On Sept. 21, Mr. Xi held his emergency Politburo session and
canceled Mr. Liu's trip. When the U.S. put new tariffs in place
three days later, China responded with new tariffs of its own.
On to Buenos Aires
China's leaders wanted to see what happened in the U.S. midterm
elections. If President Trump's party took a drubbing, they
figured, perhaps he would soften his positions on China. When
Republicans held on to their Senate majority, however, Mr. Trump
declared victory.
As Messrs. Trump and Xi prepare to meet in Buenos Aires on
Saturday, officials from both countries are examining the
possibility of delaying higher U.S. tariffs until the spring, and
launching new talks about Chinese economic policy. Mr. Trump had
said Monday that it is "highly unlikely" he will hold off on
tariffs.
Beijing this month sent U.S. officials an outline of
economic-policy changes it might consider. The offer repeats many
existing pledges, such as removing caps on foreign investments in
autos and financial services, officials on both sides say.
Mr. Trump's team is pressing for more details and deeper
changes.
Looking for clues about what the White House is up to, Chinese
officials pored over an October speech by Vice President Mike Pence
in which he accused China of offenses ranging from abusing its
economic power to militarizing the South China Sea. They debated
whether the speech represents a broader U.S. strategy to contain
China's rise or is a negotiating tactic aimed at further pressuring
Beijing.
The Chinese still aren't sure which Trump will show up when the
two leaders get together -- the leader who surprised China with his
determination to see tariffs through, or the deal maker Chinese
leaders thought they knew.
--Peter Nicholas contributed to this article.
Write to Bob Davis at bob.davis@wsj.com and Lingling Wei at
lingling.wei@wsj.com
(END) Dow Jones Newswires
November 28, 2018 11:09 ET (16:09 GMT)
Copyright (c) 2018 Dow Jones & Company, Inc.