U.S., China Weigh Deal on ZTE, Agricultural Tariffs

The U.S. and China are closing in on a deal that would give China’s ZTE Corp. a reprieve from potentially crippling U.S. sanctions in exchange for Beijing removing tariffs on billions of dollars of U.S. agricultural products, said people in both countries briefed on the deal.

The negotiations would also ease roadblocks in China faced by a U.S. semiconductor company Qualcomm Inc., whose proposed acquisition of NXP Semiconductors NV of the Netherlands has been held up by Beijing. China’s Commerce Ministry has pledged to immediately restart its review of the acquisition, a person close to the agency said. The ministry has held up a number of multibillion-dollar cross-border deals being pursued by U.S. companies over the past few months.

ZTE is a Shenzen-based telecommunication-equipment producer that has been hamstrung by a U.S. ban on component sales to the firm.

A deal isn’t completed and could fall apart as discussions continue, particularly since the U.S. side is sharply divided over how to deal with China. On Sunday, President Donald Trump said in a tweet that he was working with Chinese President Xi Jinping to get ZTE “a way to get back into business, fast. Too many jobs in China lost.” He said the Commerce Department has been instructed to “get it done!”

The tweet took many in Mr. Trump’s inner circle by surprise, said people involved in the discussions, and wasn’t preceded by interagency discussions on the policy. Treasury Secretary Steven Mnuchin, who has been leading discussions recently with Chinese officials in Washington, has been the key player in the ZTE deal discussions, said people involved in U.S. talks with China.

Futures for soybeans and some other agricultural commodities bounced after The Wall Street Journal first reported Monday that U.S. and Chinese officials were working on a deal. July-dated soybean futures rose 2% to $10.24 a bushel at the Chicago Board of Trade on Monday morning, adding to gains made earlier in the day. Corn prices were also slightly higher.

Under the deal being discussed, the U.S. would relax last month’s order banning American companies from selling components to ZTE, which has long been viewed as a Chinese national champion for its effort to take a global lead in establishing 5G mobile internet networks. That Commerce Department ruling, based on allegations that ZTE didn’t comply with a previous settlement over illicit sates to Iran, would cripple not only the company itself but also other state-controlled Chinese firms including China’s three large telecom carriers, Beijing officials have said.

In return for the potential relief on ZTE, the people say, China would agree to hold back tariffs on a variety of U.S. agricultural products it announced in early April as retaliation for U.S. tariffs on Chinese steel and aluminum exports. The U.S. products targeted include ginseng and pork.

China would also ease some nontariff restrictions on American farm products as part of the potential pact, according to the people. For instance, since late last year, China has tightened quality testing for U.S. soybeans, resulting in the crop getting held up at Chinese ports.

The Trump administration worries that a backlash among U.S. farmers to tariffs could endanger Republican efforts to keep control of the House and Senate in midterm elections.

A deal would be a kind of confidence-building exercise as China’s chief economic envoy, Liu He, is expected to arrive in Washington on Tuesday for talks through the end of the week. The two sides hope to put together a preliminary deal resolving their trade fights, which have roiled world markets.

After Mr. Trump’s tweet on Sunday, U.S. investment firm Rangeley Capital noticed an almost instantaneous change in Chinese regulators’ attitude about the proposed merger between Qualcomm and NXP Semiconductors. Chinese regulators previously had held up approval of the deal in response to growing trade tensions, including the U.S. action against ZTE.

“All of a sudden it was a tweet the president put out on ZTE,” said Rangeley partner Chris DeMuth Jr. “And then [the Chinese regulator] started up the review again.” Rangeley is an investor in NXP.

Disputes between the world’s two largest economies include U.S. tariffs on Chinese steel and aluminum exports, U.S. allegations that China forces American companies in China to transfer technology to their Chinese partners and U.S. accusations that ZTE conducted illicit sales to North Korea and Iran.

More broadly the U.S. wants China to reduce the $375 billion U.S. trade deficit in goods with China and increase imports of U.S. products. A U.S. proposal in early May called on China slash that deficit by at least $200 billion by the end of 2020, a number China rejected. Since then the two sides have been talking about how to reduce the gap through increased purchases of U.S. goods and services.

The negotiations are complicated by mistrust on both sides. The U.S. wants to make sure that any concessions the Chinese make can be verified and aren’t followed by new barriers that disadvantage U.S. companies. The Chinese want to be certain that a settlement with the U.S. won’t be followed in a year or two by another broad-based attack on Chinese economic practices.

The two sides have been at loggerheads for months, trading threats of tariffs and other sanctions. One big change has been the prospect of a deal between the U.S. and North Korea to eliminate North Korea’s nuclear weapons. China’s aid is crucial for that deal to be successful.

Complicating matters, the U.S. side is bitterly divided between Mr. Mnuchin and others in the administration. U.S. Trade Representative Robert Lighthizer and White House trade adviser Peter Navarro want a tougher U.S. line against China and deep changes in Chinese practices, including the elimination of subsidies that help Chinese companies compete internationally. Forcing those changes could require the U.S. to go through with threats and levy tariffs on as much as $150 billion of Chinese imports, moves that would disrupt the relationship and could sink markets.

The unfolding deal is already kicking up criticism from trade allies of the administration. “It’s outrageous,” said American Enterprise Institute China scholar Derek Scissors. “We are giving up on punishing ZTE for the Chinese restoring the trade status quo.”

Mr. Scissors, who has consulted with the Trump administration on China policy said, the prospective deal “shows we have nothing like the resolve necessary to take on the Chinese.”

The Chinese were more hopeful about the outcome. “The two sides will work together for positive and constructive outcomes for the upcoming consultations,” Lu Kang, China’s Foreign Ministry spokesman, said at a regular briefing Monday. Mr. Lu, who didn’t elaborate, said Mr. Liu will be in Washington until Saturday.

Write to Lingling Wei at lingling.wei@wsj.com and Bob Davis at bob.davis@wsj.com

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