The near-deal between the U.S. and China that fellapart six months ago is now being used as the benchmark todecide how much tariffs should be rolled back in the initial phaseof a broader trade agreement, people familiar with the talkssaid.

The two sides, which are locked in tough—perhapsfinal—negotiations on a phase-one pact, are discussing linking thesize of tariff rollbacks to the preliminary terms set in thatfailed May deal, according to the people, two of whom said theWhite House is still debating the precise percentage internally.The Chinese have demanded that all tariffs imposed after May beremoved immediately and then tariffs imposed before that be liftedgradually, according to one of the people.

The duties under discussion for a potential rollback include theinitial tariffs on some $250 billion in Chinese goods thatPresident Donald Trump imposed last year, according to two people.Some of his advisers had been pushing to keep those in placelonger-term, to ensure that China lives up to its end of thebargain, but now are open to partial relief in order to get thephase-one deal signed.

With the economies of both countries—and, more broadly, acrossthe globe—showing clear signs of softening under the weight of thetariffs, negotiators are under growing pressure to ink a deal, orat least part of it. But with thousands of products caught in thetariff tit-for-tat over the past year, the two sides have thecomplicated task of sorting through and deciding which goods getrelief and which do not.

U.S. officials have differing views on how much phase one wouldcover and what portion of the tariffs the Trump administrationshould agree to roll back, two people familiar with the mattersaid. The internal figure under discussion ranges from around 35percent, pushed by U.S. Trade Representative Robert Lighthizer, tothe 60 percent that Trump has said the deal encompasses, accordingto the people, who asked not to be named because the talks areprivate.

Once both countries have settled on a number, either the tariffrate could be lowered by the agreed-upon percentage or tariffscould be eliminated based on that figure.

A spokesman for Lighthizer didn't respond to a request forcomment, and the White House declined to comment. Stocks movedhigher Tuesday on the news initially and were mixed after asinvestors weighed trade developments against disappointing reportsfrom retailers.

Analysts say the first phase covers significantly less than whatTrump has been promising publicly because it leaves on the tablemost of the thorny issues at the heart of the trade dispute.There's also widespread skepticism on both sides that the countrieswould ever reach a second-phase agreement that would tacklestructural reforms.

Trump, who calls phase one a "substantial" agreement, for weekshas been trying to sell the deal domestically and push back atcriticism on the limited scope of the agreement.

"We will finish out the large Phase One part of the deal, thenhead directly into Phase Two," he tweeted on Oct. 13.

….I agreed not to increaseTariffs from 25% to 30% on October 15th. They will remain at 25%.The relationship with China is very good. We will finish out thelarge Phase One part of the deal, then head directly into PhaseTwo. The Phase One Deal can be finalized & signed soon! —Donald J. Trump (@realDonaldTrump) October 13, 2019

The Trump administration has import taxes in place on some $360billion in goods from China and has threatened to impose new levieson another $160 billion in products on December 15.

Before the May talks collapsed and precipitated a summer ofescalation, the U.S. had 25 percent duties on some $250 billion inimports.

The phase-one deal, if finalized, would likely includeelimination of the tariffs that went into effect in September andthe additional batch that's set to take effect in December, two ofthe people said.

'Thorough Discussions'

The linkage of a rollback with the size of the potential dealwas hinted at by China's commerce ministry last week. "If China andthe the U.S. reach a phase-one deal, the level of tariff removalshould reflect the importance of the phase-one deal," spokesman GaoFeng said. "The importance of the phase-one deal should beevaluated by both sides, and the two sides are in thoroughdiscussions."

The Commerce Ministry didn't respond to a faxed request forcomment.

The normally closed-door negotiations have spilled out into theopen recently and riled global financial markets, with the twosides confirming almost two weeks ago that they would roll backtariffs in any deal, before Trump said he'd not agreed to anything.Since then, he has threatened more tariffs if no deal is reached,even as U.S. officials have signaled the talks are in the finalstages.

This is the first indication that the two sides are basing theirdiscussion on the May deal text, which the U.S. accused China ofreneging on. Trump tweeted in October that the phase-one deal wouldcover about 60 percent of the "total deal," although it's unknownwhether that total deal is the same as the May one.

The move to link tariff rollback to the size of the deal appearsintended to give Beijing an incentive to agree because it answers akey Chinese demand: that there be a clear path for the removal oftariffs. The lack of a promise from the U.S. to remove all thetariffs was one of the reasons China gave for the collapse of thetalks in May.

But the debate over the size of the first-phase deal and thelink to the duties puts Trump in a position where he may make moreconcessions than expected on his go-to tool ofleverage—tariffs.

The longer the negotiations drag on, the more uncertainty arisesfor businesses that have to plan shipments for the Christmas seasonand the new year. The U.S. threat to impose more tariffs next monthis not yet off the table, and China has promised to retaliate.

When the two sides agreed to a limited, phase-one deal inOctober, there was an expectation that it would be signed inNovember, when the two presidents could have met at aninternational conference. But after the cancellation of thatmeeting due to civil unrest in Chile, Trump and Chinese PresidentXi Jinping still haven't agreed on a new signing venue anddate.

–With assistance from Scott Lanman& Jeff Kearns.

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