Gloves Come Off: China “Insists” Existing Tariffs Must Be Scrapped For “Phase 1” Trade Deal

Until now, China had largely kept the key hurdles in the ongoing US-China trade talks close to the vest, fearful that “breaking the embargo” so to speak on what have been confidential talks so far, could anger the US side. Now in a surprise diplomatic reversal, one which has the intent of signaling to the world that China will no longer play by Washington’s unspoken if assumed rules, overnight China’s nationalistic Global Times tabloid reported that Beijing now “insists” that existing tariffs must be removed as part of a “Phase 1” trade deal, well beyond the US “ask” of merely scrapping those tariffs which are set to kick in on December 15.

“Sources with direct knowledge of the trade talks told the Global Times on Saturday that the U.S. must remove existing tariffs, not planned tariffs, as part of the deal,” said the report.

Global Times, which is published by the official People’s Daily newspaper of China’s ruling Communist Party, also cited another unidentified source close to the talks as saying U.S. officials had been resisting such a demand because the tariffs were their only weapon in the trade war and giving up that weapon meant “surrender.”

Which is precisely what we said last night, when we noted that by going public with its demands, it would make Trump look even weaker, as the US president can no longer spin the outcome of negotiations as one where he proposed the removal of existing tariffs, but rather such an act would be seen as caving to China.

Here we go: China breaks the negotiation embargo and goes public with its deal demands, insisting rollback of existing tariffs. Trump now can’t concede or will be seen as caving to China https://t.co/h4ZnFa8Q0Q

— zerohedge (@zerohedge) December 1, 2019

Of course, by eliminating existing tariffs, the US would lose any leverage it currently has as it is only the current tariffs squeezing Chinese exporters that make the current situation unpalatable for Beijing, and any roll back to a status quo would mean that China can now indefinitely delay any further concessions toward a bigger trade deal.

Needless to say, should Trump agree, he would be squeezed by both parties as having capitulated to Beijing after a year and a half, with absolutely nothing to show for it besides the S&P at all time highs, of course, which however is not his but rather the Fed’s doing.

On Tuesday, Trump said Washington was in the “final throes” of a deal aimed at defusing a 16-month trade war with China, a few days after Chinese President Xi Jinping had expressed his desire for a trade agreement. Top trade negotiators for both countries also spoke again and agreed to continue working on the remaining issues.

Trade experts and people close to the White House told Reuters last month, however, that signing a phase one agreement may not take place until the new year as China pressed for more extensive rollbacks of tariffs, with US trade hawks led by Peter Navarro, refusing to concede realizing well that such an act would be a surrender by the US.

Last Tuesday, Senate Finance Committee Chairman Chuck Grassley told reporters that Beijing invited U.S. Trade Representative Robert Lighthizer and Treasury Secretary Steven Mnuchin for in-person talks in Beijing. Grassley said Lighthizer and Mnuchin were willing to go if they saw “a real chance of getting a final agreement.

A source familiar with the trade talks also told Reuters that U.S. officials could travel to China after Thursday’s Thanksgiving holiday in the United States.

It is unclear if Trump will comply with China’s demands and roll back all existing tariffs just to avoid any market turbulence in the critical, for his re-election, year 2020.