Excellent news from White House manufacturing policy advisor Peter Navarro as he discusses the re-engagement in U.S. and China trade discussions. Great INFO.

You won’t see this interview highlighted by MSM. As we anticipated the prior 150 page agreement negotiated by USTR Robert Lighthizer and Vice-Premier Liu He, previously dismissed by Beijing after three months of intense discussions, is now the starting point for new talks. This means the Chinese have acquiesced to the prior terms they rebuked.

The seven chapters, each assigned to a specific trade sector, are the baseline for Lighthizer and Liu He to re-engage. Excellent news from the position of the U.S. team.

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The CNBC knucklehead injecting about a Hauwei compromise was quickly corrected by Navarro. The Commerce Department restrictions and process for 90-day licenses to do business with Hauwei remains unchanged.

On May 20th, 2019, Commerce Secretary Wilbur Ross announced the U.S. Dept. of Commerce, Bureau of Industry and Security, would be issuing Temporary General License (TGL) permits for U.S. business interests who wish to engage in commercial exchanges with Huawei.

The Commerce Department reviews each request, outlines what products can be exchanged, and restricts the company to a transaction of product approved by the license. Each license lasts 90-days.

“The Temporary General License grants operators time to make other arrangements and the Department space to determine the appropriate long term measures for Americans and foreign telecommunications providers that currently rely on Huawei equipment for critical services,” said Secretary of Commerce Wilbur Ross. “In short, this license will allow operations to continue for existing Huawei mobile phone users and rural broadband networks.” (link)

Additionally, with the exception of the transactions explicitly authorized by the Temporary General License, any exports, reexports, or in country transfers of items subject to the Export Administration Regulation (EAR) will continue to require a special license granted after a review by the Bureau of Industry and Security (BIS) under a presumption of denial.

Under the new regulations any company wishing to engage in a commercial transaction with Huawei has to apply and gain pre-approval from the U.S. Commerce Department. Hence, the issuance of a 90-day license. Any product or service not approved by the license is not allowed to be exchanged.

This process began on May 20th and still exists today. This process is what President Trump was referencing when he announced the U.S. and China would restart trade negotiations as it related to Huawei. Specifically when the president said: “Ross will evaluate each request”.

Nothing can be purchased from, or sold to, Huawei Technologies Co. Ltd and/or its sixty-eight non-U.S. affiliates, without getting permission from the U.S. commerce department. Nothing in the agreement between President Trump and Chinese Chairman Xi Jinping changes that process.

Navarro is now confirming Beijing has accepted the closed chapters of the prior negotiation as a starting point between the Chinese and U.S. teams. The agreements between all parties, prior to the collapse, is now the agreed starting point.

This indicates the hawks in Beijing, those who formerly balked, have now retreated from their antagonistic position toward the agreement negotiated by Liu He.

It is likely they saw growing ramifications and consequences over the past 30+ days. In essence, after getting a taste of what was coming, Beijing saw a cycle of continual collapse as their future; they had no option but to try and stop the downward spiral.

This internal outlook, overlaying their historic zero-sum perspective, would make sense given the latest developments; partly because the reality of an increasingly losing position was their new baseline. A cessation of further damage was their best scenario.

Summary: Trump forced Beijing to see less-loss as the better loss.

However, as noted in the attitude of President Trump, he retains the larger tariff level despite China’s re-engagement. Trump has allowed the restart itself to be the face-saving Xi needed, yet he retains the prior tariff gains. Team Trump yielded nothing back.

Do not take this dynamic lightly. China has never negotiated for, nor accepted, less-loss before. Understanding this is new ground for them we can only imagine the anxiety within internal discussions. Vice-Premier Liu He cannot turn to the Beijing Hawks and say: ‘I told you so’. He can only start again and hope the same outcome does not repeat.

Both teams know the prior closed chapters were negotiated in good faith by Liu He, Robert Lightizer and Mnuchin. It wasn’t the U.S. who walked away from prior commitments. Therefore it makes additional sense for Chairman Xi to offer the Ag purchases as a show of good faith; and, in turn, President Trump gives the optics of compromise on high-tech.

Returning to the original point of collapse, the stickler point was/is the enforcement mechanism if China cheats. This is where Lighthizer had built sector-by-sector, product-by-product, escalating and countervailing tariffs into the compliance chapters.

Unlike traditional trade agreements with one enforcement chapter that encompasses all of the sectors within the aggregate agreement, Bob Lighthizer built specific enforcement mechanisms into each sector. Essentially, each product had it’s own compliance requirements unique to the sector of trade.

That multi-layered compliance is where China recoiled because they saw the U.S. as having ultimate decision-making about whether the rules were being followed. However, that construct was/is the unidirectional price Lighthizer was applying due to the history of Chinese duplicity and cheating.

Any U.S. company (or U.S. entity) harmed by Chinese trade practices (ie. ‘cheating‘, ‘theft’, ‘coercion’, etc.) would have a set of enforcement provisions to protect their interests specific to their unique sector inside the agreement. The scale of this approach is rather overwhelming to consider; however, as Lighthizer told congress this is the only way to insure compliance and protect very diverse U.S. trade interests.

You have to write the agreement while predicting the other party will attempt to lie, cheat and steal; and they will do so with the sanctioning of the communist government.

Lost in all of the discussions by western media is the fact that no-one has ever attempted to structure a comprehensive and enforceable trade agreement with China before. What the U.S. team is attempting will be the road-map for all other nations who will likely write similar agreements of their own.

Writing a trade agreement between a free-market (USA) and a controlled-market (China) is where the challenge lies. One of the inherent issues will always be how the free-market system can hold the controlled-market system accountable if they cheat.

Given the controlled-market’s governmental support for the cheaters, the accountability will naturally have to come from outside the system. It remains to be seen if it can be done.

Arguably President Trump has a disposition that he doesn’t see how a deal is possible. However, Trump is willing to allow Lighthizer, who really is brilliant (along with Secretary Mnuchin and Secretary Ross), plenty of space to approach this problem with unique solutions.

As President Trump just said: “The quality of the transaction is far more important to me than speed. I am in no hurry.”

The tariffs will continue until behavior improves.