US and China still in disagreement over how to enforce currency pact

The deal stipulates Beijing must not depreciate the yuan

People walk by a giant decoration in the shape of a pig ahead of the upcoming Chinese Lunar New Year in Yu Yuan Garden in Shanghai, China January 31, 2019. REUTERS/Aly Song
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The United States and China have not yet agreed on the critical issue of enforcement in a proposed currency deal that would ensure Beijing lives up to its promise to not depreciate the yuan, four people familiar with the matter said.

Treasury Secretary Steven Mnuchin on Friday touted the currency pact as the strongest ever, though he offered no details, following two days of high-level talks in Washington between US and Chinese officials. The discussions were extended into the weekend in search of a broad trade deal to prevent the US from increasing tariffs on Chinese goods next week.

US President Donald Trump has previously accused China of gaming its currency to gain a competitive advantage, although his Treasury Department has repeatedly declined to name the Asian nation a manipulator in its semi-annual reports on foreign-exchange markets.

Still, the US asked China to keep the value of its currency, the yuan, stable as part of trade negotiations between the world’s two largest economies. If successful, that would neutralise any effort by Beijing to devalue its currency and make its exports cheaper to help counter American tariffs.

As part of the talks, China has offered to buy more American goods such as agricultural products and energy, in a bid to meet Mr Trump’s demand to shrink the US trade deficit. The two sides are also still haggling over much deeper reforms to China’s economy, including addressing the alleged theft of intellectual property from US companies operating in China.

US Trade Representative Robert Lighthizer, who is leading talks for the White House, said on Friday that the negotiators have made progress on structural issues related to the Chinese economy but still face obstacles. “We have major hurdles,” he added.

Neither the Treasury nor USTR responded immediately on Saturday to a request for comment on the currency negotiations.

Mr Trump has said he will need to finalise any trade deal directly with Chinese President Xi Jinping. Mr Mnuchin said that a leaders’ meeting for late March at Mr Trump’s Mar-a-Lago resort in Florida is being tentatively planned.

The success of the currency pledge hinges on what enforcement mechanism the two countries decide on for the entire agreement, two of the people said. Mr Lighthizer has said any deal with China needs to contain a strong enforcement mechanism to ensure long-lasting changes to the trading relationship. The White House has complained that Beijing has failed to follow through on its pledges to carry out reforms under previous administrations.

Two people familiar with the talks said an option under discussion to enforce the agreement is the possibility for the US to increase tariffs on Chinese goods if Beijing breaks its word.

Currency moves have become part of the discussions over trade by the Trump administration. The US secured a currency pact in the new North American Free Trade Agreement with Mexico and Canada and has said it will seek similar commitments in future trade deals.

China’s yuan fell more than 5 per cent in 2018 as trade tensions boiled over, raising speculation that Beijing was deliberately weakening its currency to offset the impact of tariffs. The yuan has rebounded nearly 2 per cent year-to-date, after sliding to a decade-low against the dollar in late October.

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