The US and China are living in different universes

By David Flicking / BLOOMBERG

Have US and Chinese trade negotiators been meeting with each other in recent months, or with bands of convincing impostors?

You almost have to ask the question, because media reports about who “broke the deal” over the past week seem to have been filed from two different universes.

In a Reuters report published on Wednesday and attributed principally to three US government sources, the Chinese had been on the brink of an unconditional surrender before trying to wriggle out of it at the last minute.

A nearly 150-page, seven-chapter draft had included binding legal language to change its legislation on intellectual property theft, forced technology transfers, competition policy, currency manipulation and access to financial services, Reuters reported, alongside an enforcement regime similar to those imposed on troublesome countries like North Korea and Iran.

Beijing tried to reverse all that in a series of last-minute edits, according to the report.

That backs up an earlier report by Jenny Leonard, Saleha Mohsin and Jennifer Jacobs of Bloomberg News, citing people familiar with the matter, saying that the Chinese went back on promises to include changes to its laws in the text of the deal.

An article in the Wall Street Journal, sourced to “people familiar with the thinking of the Chinese side”, had a vastly different read.

US President Donald Trump’s tweets about his friendship with President Xi Jinping; praise of China’s economic stimulus; criticism of the US Federal Reserve; and positive statements about planned Chinese purchases of US soybeans — all were taken as evidence that Washington’s resolve was weakening along with its economy, according to the report.

Beijing never had any intention of specifying which laws it was prepared to change to get a deal over the finish line, and didn’t take seriously hints from the US that time was running out, it said.

Such starkly differing interpretations of the same event aren’t all that unusual. There’s even a term for the phenomenon: the “Rashomon effect”, in reference to an Akira Kurosawa film in which witnesses give contrasting accounts of a murder. Still, the risks of such misinterpretation are a familiar hazard of diplomacy, especially in discussions between negotiators with different languages and cultural contexts, so it’s somewhat astonishing to see such a gap still yawning between the two sides after all the talking that’s been done over the past year.

What would a more realistic accord look like? As we’ve argued from the start of this process, the two sides are much more evenly matched than Washington’s negotiators appear to recognise — with the odds, if anything, likely to marginally favour China.

Factions in Beijing — including Premier Li Keqiang and Xi himself — have long favoured reform around intelectual property and inward investment that would meet many US demands. Indeed, in areas such as foreign investment and patent enforcement, legal changes are already quietly taking place away from the spotlight. But national pride, and a Communist Party ideology grounded in resisting unequal treaties in the name of free trade, mean that such shifts could never be seen to be done under duress.

As for the more expansive demands from Washington’s trade hawks around reducing the state’s role in the Chinese economy, those have always seemed delusional.

A limited agreement, with a few commitments on agricultural and energy purchases dressed up in fancy language, always looked like the most credible path to a pact.

Why has this plain reality been so opaque to the political leaders in Beijing and Washington, leading them to drastically miscalculate and overplay their hands?

One explanation is that the information flow among senior officials hasn’t been structured to communicate difficult realities to the top.

In a well-functioning political system, the whims and pride of political leaders should be kept in check by honest advice that keeps their ambitions tethered to reality.

When those ties are loosened, decision-making risks becoming lost in a fog of self-aggrandisement.

It’s hardly a surprise that this latter style is now prevalent in both Beijing and Washington. Trump’s unwillingness to tolerate dissent is well documented, but even within China’s more inherently dysfunctional authoritarian leadership the centralisation of power under Xi has had a similar effect.

Still, it bodes ill for the prospects of the current round of talks that started yesterday. So far, we’ve only seen denial and anger from both sides; if we want to make it to a deal, we’ll likely have to go through a good amount of bargaining — and depression — first. — Bloomberg

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.