The annual trade talks held between the United States and China ended in failure late on Wednesday, suggesting a deepening rift on exports and market access that is playing out in the markets. To be honest, with the U.S. side laying out demands while giving up little to nothing in return, the Chinese were well within their rights to listen, then walk out.
The breakdown, with the scheduled press conferences cancelled by both sides and the Chinese negotiators hustling out with no comment, is good news for industries such as U.S. steel but bad for banks and manufacturers of drugs and cars.
Any hopes of progress on issues such as market access, reduced tariffs or heightened caps on foreign ownership of Chinese companies have evaporated, as my colleague Martin Baccardax explains. Unusually for these kinds of meetings, there wasn't even some kind of wishy-washy joint statement or official-sounding meaningless plan for the talks to lead to more talks.
The U.S. delegation released a one-sided short statement late in the day saying China acknowledged "our shared objective" to reduce the trade deficit. The "principles of balance, fairness, and reciprocity" will guide the U.S. position, to give "American workers an opportunity to compete on a level playing field."
The likelihood of the United States imposing tougher tariffs on steel, which it believes China offloads at artificially low prices driven down by government meddling, is now higher. President Donald Trump, when asked at the White House by a reporter whether he would seek higher levies on Chinese steel, said "Could happen."
That exchange came after the market closed on Wednesday. Shares of United States Steel (X) had already gained 4.8% on the day, with AK Steel (AKS) up 3.6% and Nucor (NUE) benefitting to the tune of 2.2%.
Drug companies are battling to get access to the Chinese market, and like car makers and food producers, need such talks to help improve trade terms. The government controls all in China.
For instance, although they're gaining access to a market of millions of people, European drug companies such as Roche (RHHBY) , GlaxoSmithKline (GSK) and AstraZeneca (AZN) have just had price cuts of as much as 70% put in place if their products are to be sold through a government-insurance scheme. Those prices are fixed by the state.
I don't blame the Chinese for walking away this time. Trade talks are negotiations, not a series of demands that must be met. But if the flow of trade from China to the United States is largely one way, the ultimatums work in the other direction.
They include "U.S. demands for access to China's financial services markets, reducing excess Chinese steel capacity, reductions in auto tariffs, cutting subsidies for state-owned enterprises, ending Chinese requirements for data localization and lifting ownership caps for foreign firms in China," according to an unidentified senior U.S. official quoted by Reuters.
He didn't say anything at all about what China would get in return.
The talks were supposed to cap off the 100-day period to establish a new dialogue on trade. Trump and Chinese President Xi Jinping set the timeline when they loved it up at Mar-a-Lago, Trump's Florida golf getaway, in April. Now that deadline for creating a plan has come and gone.
It's clear the smiles and shaking hands were all for the cameras. Since then, China resumed importing beef from the United States. It has also granted limited expanded access to its financial markets for U.S. firms. But there have been no major initiatives.
The Chinese embassy insisted in a statement after the collapse of these latest talks that the two sides had made "significant progress." Xinhua, China's official news agency, said the talks were "candid and down-to-earth." But Chinese officials gave absolutely no concrete examples.
"The two sides will expand areas of cooperation in services and increase trade in services; expand mutual investment, and create a more open, equitable, transparent and convenient investment environment," the embassy insists.
China quite sensibly says it can't really help it if Americans want to buy lots of the stuff its companies produce. And I'm not sure a large trade imbalance is the kind of disaster that Trump makes it out to be -- the U.S. economy and American consumers benefit from cheaper goods and parts. Yes, there's a $347 billion surplus in one direction, but this is trade, not a poker game where one side wins the chips and keeps them.
U.S. companies need to pick up their performance and make more of China as a market, the Chinese officials say. Tech companies in particular should be shipping more goods to China, while the U.S. government should remove its outdated export controls, which are doing U.S. companies a disservice. And that makes eminent sense to me.
"Both sides agreed that one of the solutions to address the trade imbalance is for the United States to expand its exports to China, instead of reducing imports from China," Chinese Vice Finance Minister Zhu Guangyao said in reaction to the talks.
Actually, the United States has a trade surplus in services with China, Zhu said, while the trade of goods is in China's "favor." Since China is attempting to stimulate the service sector, and those industries are increasingly the future anyway, that bodes well for U.S. companies.
U.S. high-tech exports to China made up 16.7% of China's total tech imports in 2001, Zhu says. But that share fell to 8.2% last year.
If the United States lowered its export barriers with China to levels similar to those it has with France, its trade deficit with China would shrink by as much as 24%, according to the Chinese, citing figures from the Carnegie Endowment for International Peace.
Lower the restrictions on the export of U.S. goods and services out of the country to China to the same level as Brazil, and the trade deficit with China would fall 34%, that data shows.
The two sides are now supposed to come up with a one-year action plan for economic cooperation, according to Zhu, which sounds dramatic but will probably result in a flurry of bureaucratic fiddling around among lower-level diplomats, if anything at all.
It is true that China denies overseas investment exposure to touchy industries like defense and even toll roads. It limits foreign-investor ownership and market access to industries like banking and insurance, terrified of allowing Chinese yuan to slip out of the country. And it has a vast network of state-owned enterprises that are basically backed by the government, allowing inefficient companies to sell cut-rate products overseas.
But China is following through on promises made when it joined the World Trade Organization to free up various industries, including finance. Xi is pushing the much-needed reform of the state-owned sector. That's structural change, which takes years to achieve and, given job losses and pay cuts, unpopular to push through. He'll get there. But China's strongest leader since Mao Zedong still needs time.
Let's face it, some U.S. industries aren't globally competitive. Steel and mining pay hefty wages for raw materials found more easily and at cheaper price elsewhere. U.S. agriculture also receives massive subsidies and protectionist policies.
A self-serving statement from U.S. steel and aluminum producers that the U.S. should block sales of Chinese steel "on national security grounds" doesn't help, and doesn't make any sense. China is deliberately selling substandard steel to go in U.S. tanks? The U.S. Army can't spot the real deal?
These talks, dubbed the first China-U.S. Comprehensive Economic Dialogue, are just the first in four "major dialogue mechanisms" set up when Trump and Xi met in April. Expect more hot air and even less progress out of the other three.
If the two governments can't sort anything out, they should get out of the way and let the private sector take the lead.
Blackstone Group (BX) CEO Stephen Schwarzman and Alibaba Group Holding (BABA) CEO Jack Ma led a group of 20 executives who said they'll work to increase trade in both directions. That includes the export of U.S. agricultural produce, liquefied natural gas and consumer goods to China.
Again, the focus appears entirely one-way. Since U.S. legislators are stepping up their scrutiny of Chinese investments in the United States, as I explained recently, I'm not clear on what China stands to gain out of that process -- other than food and natural gas that it desperately needs -- than damage limitation on its own exports.
Ma and Schwarzman signed off on a statement that a "stable, growing economic relationship" between the two nations is "mutually beneficial to the people of our two countries and for the world."