Last Friday, a diplomatic cable that would essentially destroy three months worth of trade negotiations arrived in Washington. The almost 150-page draft, China’s response to negotiations with the United States, contained several reversals that go against U.S. demands, according to a number of U.S. government sources.

In each chapter of the drafted trade deal, China had retracted its commitments to make changes to laws so as to resolve the primary complaints that led the United States to launch the trade war in the first place. The complaints included theft of United States intellectual property (including trade secrets), forced technology transport, direct competition policy; accessibility to financial services and manipulation of currency.

United States President Donald Trump, in a tweet posted on Sunday, vowed to increase tariffs on $200 billion in Chinese products from 10% to 25%. The move was timed specifically to take place during a visit by China’s Vice Premier Liu He to Washington D.C. to continue trade negotiations. According to a Federal Register notice, the U.S. stated that the tariff increase would become effective on Friday. Trump stated last Wednesday that China is mistaken if it plans to negotiate a trade deal at a later time with a Democratic administration.

The rapid break down of negotiations is having an impact on global stock markets, bonds and commodities. Investors and analysts are questioning whether Trump’s tweet was part of a plot to get China to make more concessions. Sources told Reuters that the setbacks in the revised statement were in fact serious and that Trump’s response on the matter was not part of a negotiating strategy.

Today, U.S. indexes are mostly weaker again, possibly pointing to a third consecutive day of losses. The S&P 500 has dropped by more than 2% this week. Yields on benchmark treasury securities dropped to the lowest in over a month.

Chinese negotiators said they were unable to make changes to the laws, according to one government source, referring to the changes as “major.” Making changes to any law in China requires a specific set of steps that cannot quickly be completed, said one Chinese official familiar with the negotiations. The official disagreed with the assertion that China was trying to backtrack on its promises, stating that demands from the U.S. were becoming increasingly “harsh” as the negotiations continue.

Liu is scheduled to arrive in Washington D.C. for two days of negotiations tomorrow. Just last week the talks were widely viewed as being pivotal - possibly the last round prior to a historic trade deal being completed. Now, United States officials hold little hope that Liu will present any type of offer that would get talks back on track.

To avoid any escalation, some sources said that Liu would have to throw out China’s proposed changes to the draft text and agree to put new laws in place. China would additionally have to move closer to the U.S. position on other key points, such as the demand for reductions on Chinese industrial subsidies and a faster approval process for GMO United States crops.

According to the U.S. administration, the latest tariff increase will go into effect at 12:01 a.m. this Friday, increasing levees on Chinese goods such as modems and routers, circuit boards, vacuum cleaners and more. The tweets that were posted by Trump left him no room for backing down and despite the ongoing talks, as of Friday the new tariffs will take effect.


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