Prospects dim for breakthrough in Trump’s trade war with China

The odds of a breakthrough in upcoming trade talks with China took a turn for the worse this week after the Trump administration imposed a slew of new sanctions on Beijing over alleged human rights abuses.

The Department of Commerce on Monday night added 28 Chinese companies to its “Entity List,” blocking them from buying U.S. products.

“These entities have been implicated in human rights violations and abuses in the implementation of China’s campaign of repression, mass arbitrary detention, and high-technology surveillance against Uighurs, Kazakhs, and other members of Muslim minority groups,” the agency wrote in the Federal Register.

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The following day, Secretary of State Mike Pompeo imposed travel bans on government leaders and Communist Party officials, alleging they are complicit in human rights abuses.

A Chinese Ministry of Commerce spokesperson hit back by saying the United States should “immediately stop making irresponsible remarks” and “stop interfering with … China’s internal affairs, and remove relevant Chinese entities from the list of entities as soon as possible.”

The spokesperson also warned that China would take “all necessary measures” to protect its interests.

The ratcheting up of tensions between the world’s two largest economies came as Washington prepares to host a Chinese trade delegation led by Vice Premier Liu He on Thursday to revive trade talks.

A lack of progress in the negotiations would prolong a year-plus trade dispute that has already cut into economic growth in the United States and around the world, while a setback would increase the odds of new tariffs or increases on ones that date back to July 2018.

Neither scenario would bode well for President Trump heading into an election year where economists are forecasting a slowdown in growth.

Thursday’s negotiations had been seen as an opportunity to scale back a trade war that has led to tariffs on billions of dollars of traded goods and taken a bite out of global economic growth.

International Monetary Fund Managing Director Kristalina Georgieva said Tuesday that growing trade wars could eat up as much as $700 billion in global economic activity by the end of 2020, right around Election Day in the U.S.

“Everyone loses in a trade war,” she said. “Global trade growth has come to a near standstill.”

Markets dropped Tuesday on news of new U.S. tensions with China, with the Dow Jones Industrial Average closing down 314 points, or 1.2 percent.

The ongoing dispute with China is also lowering the outlook for U.S. growth. A survey of business economists forecast growth at 2.3 percent this year followed by 1.8 percent in 2020 — far below Trump’s campaign promise of 3 percent annual growth.

After a major summer blow-up that led to a spike in tariffs, the Trump administration and China had spent much of September making goodwill gestures to set the tone for the October talks.

Beijing began buying American soybeans, and Trump agreed to postpone planned tariff increases scheduled for Oct. 1.

Gary Clyde Hufbauer, a nonresident senior fellow at the Peterson Institute for International Economics in Washington, said there may be an upside to the recent spat over security issues.

“The way I see it, we’re beginning to get the separation between normal trade issues and security issues,” he said. “Trump could even appoint separate negotiators for the security track.”

The Trump administration, he noted, has continuously intermingled the two issues, at times using security-related sanctions on Chinese telecom giant Huawei to influence the trade talks.

Although the latest security moves lowered the odds of an across-the-board deal to end the trade war, separating out the security issues into their own track could lead to a successful, narrower deal.

“You could say it has that silver lining, because there’s a lot of trade that it’s hard to argue is a security issue,” Huffbauer said.

“I don’t even know if a grand deal is possible in the next administration, but certainly not in this administration,” he added.