After a year of pressure on Beijing, including levying tariffs on half of everything China sold to the United States, the American trade team thought it was closing in on a deal in late April 2019 to remake relations between the world’s two economic superpowers. 

The two sides were working on a 150-page agreement covering many American complaints against China: pressure on U.S. companies to transfer technology, weak intellectual property protection, closed financial services markets, and currency devaluation. By some counts, the text required China to make at least sixty specific changes in its legal system.  

Although China still hadn’t agreed to many U.S. demands, the two sides had already started discussions about where to hold a signing ceremony. Trump’s Mar-a-Lago estate in Florida? Washington, D.C.?

But the U.S. side was naively optimistic and made several miscalculations about the power of the United States to force China to change — the first of many miscalculations both sides would make and which would unravel the agreement, embitter both sides, and deepen the economic cost of the trade war so much that it threatened to drive the global economy into recession.

First, U.S. Trade Representative Robert Lighthizer continued to insist that Washington wouldn’t remove any of its crippling tariffs when Beijing signed a deal. The tall, blunt negotiator thought that China would relent in the face of sustained U.S. pressure, a view he shared with his boss, the president.  

For Xi Jinping, though, eliminating the tariffs was a bottom-line demand, which he had made clear at the outset of negotiations. On this, he wouldn’t bend. If he couldn’t get the tariffs lifted, a deal wasn’t worth much.

Second, the Americans misread the influence of the lead Chinese negotiator, Vice Premier Liu He, who was an ally and childhood friend of Xi’s. Simply because Liu hadn’t said no to U.S. proposals didn’t mean Beijing had said yes.  

The view of the talks in Beijing was decidedly gloomier than the one in Washington. As Lighthizer and Treasury Secretary Steven Mnuchin prepared to fly to Beijing in late April for talks they hoped could help sew up a deal, Xi thought it was time to loop in the other six members of the Politburo Standing Committee, the country’s ruling body.  

At a late April meeting in the gated Zhongnanhai leadership compound, close to the Forbidden City, the onetime home of China’s emperors, Xi asked his colleagues to review the details of the negotiations. Their answers were hardly reassuring; they signaled a much stronger resistance to proceeding than anyone on the U.S. side understood.

Three of the six spoke out immediately against a deal unless China could get a firm commitment from the United States to remove tariffs on all $250 billion of Chinese exports then burdened with levies.

Li Zhanshu, head of the National People’s Congress, China’s lawmaking body, objected strenuously to U.S. demands that China change specific laws by certain dates or face tariffs. China is a sovereign nation, Li argued. No country has the right to tell China what laws it must amend.

Wang Huning, a Party ideologue focused on helping China reclaim its prominent place in the world, was another firm no. Wang, who makes a point of not meeting with Westerners, said many Chinese might view the proposed deal as a sellout, similar to the unfair treaties imposed upon China by Western forces in the nineteenth and early twentieth centuries.

Han Zheng, the most senior of China’s four vice premiers, was the most surprising of the opponents. For years he had run Shanghai, a metropolis known for East-meets-West glamour. American businesses considered him an ally who supported foreign investment. But he also thought the tentative deal was too one-sided.

The three other standing committee members — Premier Li Keqiang, anti-graft czar Zhao Leji, and veteran political leader Wang Yang, who had negotiated for years with Americans on trade — weren’t as vehement. They shared their colleagues’ concerns, though they broadly supported a deal with the United States.

Faced with, at best, tepid support, Xi — himself an ardent nationalist — decided that Beijing needed to toughen its stance in negotiations. Here, Xi too made a series of miscalculations.

Time was on China’s side, Xi believed. Trump’s tough talk masked a fear about the American economy, he thought. China’s economy, on the other hand, had stabilized, and Beijing could start counting on allies in its trade battle. Some 40 heads of state and government ignored a U.S. boycott and attended an April conference in Beijing on Xi’s signature Belt and Road Initiative. The vast infrastructure lending and construction program was designed to put Beijing at the heart of trade from Southeast Asia to Europe. 

 Be firmer with the Americans, Xi instructed Liu, the Chinese negotiator.

Shortly after Lighthizer and Mnuchin arrived in Beijing on April 30, Liu told them that the leadership strongly objected to specifying laws China needed to change. This was more than the give-and-take of prior rounds, he made clear. He didn’t have a mandate to cut a final deal; China’s leaders couldn’t accept the draft as it was written.

Okay, Lighthizer responded. Show me what you mean. Pick any of the seven chapters in the agreement and mark it up. Make as few changes as you can, consistent with your new instructions, and send it to me, he told the Chinese negotiator. Maybe the changes won’t be as radical as you’re suggesting and negotiations could continue as before.  

Liu picked the chapter on intellectual property, which was nearly completed. It called for changes in Chinese law, including criminal penalties — jail time — for those who repeatedly stole technology secrets or copied them. Lighthizer’s goal was to make IP protection in China as tough as it was in the United States or Britain. While the United States was willing to give China the time it needed to rewrite the laws, the Americans insisted that tariffs stay in place to make sure Beijing would carry out its pledges.

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On Friday, May 3, the Americans received a formal response. Chinese negotiators emailed to Washington a Microsoft Word version of the tentative agreement, with about one-third of the intellectual property section crossed out in red, including requirements that China change its laws. 

To Beijing, the changes were just another step in ongoing negotiations — yet another of the serious miscalculations made by both sides. But Washington viewed the breadth of the changes this time as more than a tactical move; it was seen as bad faith on the Chinese part.   

Outraged, Trump wanted to retaliate immediately. China at the time faced 25 percent tariffs on $50 billion of goods and 10 percent tariffs on another $200 billion. Trump wanted to increase the tariffs on the latter amount to 25 percent, which would be enough to shut out those imports, and threaten to hit the rest of Chinese imports with levies. 

Lighthizer helped talk him out of acting rashly. Markets were bound to react badly to the news, he argued. Wait until the weekend to act, which would give traders more time to digest the news, and give him more time to try to figure out what happened.

The trade representative, who had joined the administration mainly to confront China, wanted to give Liu time to sort out his political problems back home. No one in the White House understood the events in Beijing that led to the retrenchment. “Who is China’s Peter Navarro?” asked some aides — referring to the White House trade adviser who implacably opposed any deal with China.  

Early Sunday morning, May 5, Trump tweeted his threats. On Friday, May 10, tariffs on the $200 billion of goods would increase to 25 percent, and the rest of Chinese imports would soon face the same levy. “Trade deal with China continues, but too slowly, as they attempt to renegotiate,” the president tweeted. “No!” 

The outburst caught Beijing by surprise. Liu He was due in Washington on May 8 to continue negotiations, only two days before Trump’s tariff deadline. Some in his team were scheduled to arrive earlier. The negotiators received an urgent message: stay put until further notice.  

Now it was Chinese officials who didn’t understand what was happening on the other side of the Pacific. They combed through a transcript of a rare press conference that Mnuchin and Lighthizer held on May 6 to explain the president’s actions. “We tried to accommodate changes that China would ask in the text that we thought were needed for their own purposes,” Lighthizer told reporters. “But these are substantial and substantive changes. And really I would use the word, sort of reneging on prior commitments.”

Inside the Beijing leadership compound, officials tried to figure out how to reduce the hit to Chinese markets that was sure to follow Trump’s tweets. On the morning of May 6, China’s central bank sped up a plan to release more funds for banks to lend. State-backed investment funds were also instructed to buy shares to prevent a market free fall. China’s Foreign Ministry spokesman released a statement saying the Chinese delegation would travel to the United States, which often reassured markets.

The Chinese effort didn’t work. The benchmark Shanghai Composite Index fell 5.6 percent while its counterpart in Shenzhen tumbled 7.4 percent — their biggest single-day declines since 2016.

On May 7, a group of mid-level officials, including Finance Vice Minister Liao Min, a trusted aide to Liu, and Commerce Vice Minister Wang Shouwen, huddled to analyze the Lighthizer-Mnuchin press conference. Their conclusion: the Chinese side should try to keep the dialogue open to avoid a rupture that would be difficult to repair. Xi Jinping signed off on the recommendation the following day, May 8.

Liu would travel with a pared-down staff, not the team of one hundred he had earlier planned to bring to finish negotiations. Neither the Chinese nor the Americans expected a breakthrough, let alone a completed deal.

Liu arrived in Washington on May 9 and plunged into talks with Lighthizer and Mnuchin. The pair took Liu for a working dinner at the tony Metropolitan Club, a Lighthizer haunt close to the trade representative’s office. They met again on the morning of May 10. Separately, Trump complimented a “beautiful letter” that Xi had sent with the Chinese team and said he would probably speak to Xi by phone. (He didn’t.)

But the two sides made little substantive progress. On May 10, while Liu and his team were still in Washington, the Trump administration made good on its threats and ratcheted up the trade war by raising tariffs. 

Around that time, President Trump told a campaign rally in Panama City Beach, Florida, that the Chinese “had broke the deal.” Now they would pay.

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Trump’s anger at the Chinese actions had another important consequence that Beijing didn’t foresee.

With Trump looking for ways to pressure China, John Bolton, the hawkish national security advisor, laid out a course of action that would truly rattle Beijing. He planned to try to cripple China’s leading company, Huawei Technologies Company. Bolton was more of a hard-liner on China than Trump and understood better how to use government processes to get the outcomes he sought. Now that Trump was outraged by Beijing, Bolton had the president’s ear.  

For months, the United States and China had been at loggerheads over Huawei. The Americans suspected that the telecommunications company was a tool of the Chinese military, which could tap Huawei’s equipment and spy on the company’s customers around the world, a charge Huawei vehemently denied. The U.S. government had stopped buying Huawei equipment and was pressuring other governments to do the same, with limited success.

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To Beijing, Huawei was a crown jewel. It was a Chinese firm that could outcompete Western rivals. [U.S. National Security Advisor John] Bolton believed that Huawei must be stopped.

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To Beijing, Huawei was a crown jewel. It was a Chinese firm that could outcompete Western rivals. Bolton believed that Huawei must be stopped. The United States wouldn’t have trusted telecommunications to a Moscow telephone company during the Cold War, he argued. It was crazy to trust a Chinese company now.

Bolton reminded Trump that the Commerce Department had been spending months weighing whether to put Huawei on what it called its “entity list” — a group of companies whose U.S. purchases were severely limited. Only firms that obtained a Commerce license could sell to the listed companies, and at that point Commerce had never announced any waiver.  

Huawei relied on U.S. semiconductors for its advanced technology. Putting the company on the entity list could strangle the company, Bolton believed, or at least halt its advance. [That assumption turned out to be false; export control lawyers later figured out ways for their American clients to continue shipping to Huawei.] Trump liked the idea and encouraged Bolton to move ahead.  

Bolton was exultant. “The shackles are off,” he told his senior staff. Move ahead aggressively. In later months, Bolton would threaten to move intermediate-range missiles into Asia and redouble his efforts to sell advanced tanks and F-16 fighter jets to Taiwan.

In Beijing, officials were surprised and angered. Trump had miscalculated that targeting Huawei was just another pressure point. To Chinese officials, the move reinforced the idea that the United States didn’t simply want a trade deal; it wanted to stifle China and keep it from ever challenging America. China’s censors ramped up nationalist propaganda, including airing old movies glorifying the Chinese fighting Americans during the Korean War. State media labeled those advocating a deal with the United States as “capitulators.”

Xi Jinping also looked for ways to strike back. Five days after the Huawei sanctions were issued, on May 20, the Chinese leader went on an inspection tour of the southeastern province of Jiangxi and made a point of visiting its leading manufacturer of rare earths — natural elements used for wind turbines, electric cars, and jet fighters. The visit was meant to remind the United States of its dependence on China.

Xi also laid a wreath at a monument marking the starting point of the Long March, the long retreat to safety made by Communist revolutionaries that official media now portray as paving the way for ultimate victory over the Nationalists. The message to Washington couldn’t have been clearer: China was prepared for another Long March, this time toward ultimate victory over America.

 Through a series of threats, counter threats, and miscalculations, the world’s two biggest economies were edging toward a new Cold War. This one wouldn’t be defined by missiles and nuclear weapons, but by a struggle over economic and technological supremacy. Rather than working together, two great economic powers were on a path of suspicion and separation, a fissure that would damage global commerce and upset the lives of workers, consumers, and businesses from Sichuan to Seattle. The global marketplace was in danger of shattering.

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From the book SUPERPOWER SHOWDOWN: How the Battle Between Trump and Xi Threatens a New Cold War by Bob Davis and Lingling Wei. Copyright © 2020 by Bob Davis and Lingling Wei. Published on June 9, 2020 by Harper Business, an imprint of HarperCollins Publishers. Reprinted by permission.