A US-China “first phase” trade deal has been hailed as a significant breakthrough and welcomed by global financial markets, but questions remain over the deal’s enforcement and whether subsequent phases on more substantial issues can be agreed in the foreseeable future.
US President Donald Trump hailed the hard-fought agreement, which will gradually rollback American tariffs on certain Chinese imports just days before a new raft of now-suspended 15% levies were set to come into effect on about $160 billion worth of Chinese goods, as “an amazing deal for all.”
Chinese Foreign Minister Wang Yi echoed Trump’s assessment, saying on Saturday that the deal is “good news for all” and will “provide stability in global trade.”
But weighed against the high economic costs already wrought by the trade war, witnessed in slowing global economic growth, critics have already panned the agreement for delivering little structural change to Chinese economic and trade practices Trump has persistently deemed as unfair.
The Trump administration initiated its trade war against China in 2018 with the stated aim of closing America’s massive trade deficit with Beijing, which hit $419 billion that year. That deficit actually widened in the first nine months of 2019, to nearly $500 billion.
The bilateral deal announced on December 13 appears to bring Trump’s White House closer to that goal, with new Chinese purchasing commitments reportedly expected to reduce the deficit by $419 billion.
China has committed to boost purchases of US agriculture products by $32 billion over two years under the deal, politically important sales for Trump as he bids to shore up rural electorate votes ahead of next year’s presidential election.
The agreement envisions Chinese purchases of US farm goods of averaging around $40 billion total per year, compared to a baseline of $24 billion in 2017 before the trade war, which falls short of Trump’s past demands that Beijing buy $50 billion worth of US farm goods annually.
According to US Trade Representative Robert Lighthizer, China has agreed to make further efforts to increase its agriculture purchases by $5 billion annually to bring the total closer to $50 billion. China has also agreed to boost its purchases of American manufactured goods, energy and services worth at least $200 billion over the next two years.
Washington, for its part, is set to halve its 15% tariff on around $120 billion worth of Chinese goods, a commitment that will ease but not end the trade war.
Twenty-five percent levies will remain in place on roughly $250 billion worth of Chinese goods, while another $120 billion in trade will be subjected to a 7.5% duty once the phase one deal takes effect in the first week of January.
“It’s a limited deal. Neither side got a lot,” said Warren Maruyama, a trade partner at Hogan Lovells and former United States Trade Representative (USTR) general counsel. “Most Chinese exports are still subject to 25% tariffs and the main US systemic priorities have been kicked down the road into phases two and three. This is more of a baby step.”
Lighthizer has said any further US tariff reductions will be linked to the conclusion of future trade deal phases, with the 25% duty on $250 billion worth of Chinese goods clear US negotiating leverage for a second phase of trade talks expected to begin next year.
China said on Sunday it would suspend additional tariffs on some US goods that were scheduled to come into effect on December 15, the State Council’s customs tariff commission said. Beijing has imposed tariffs on $185 billion worth of US goods since the trade war started.
As part of the phase one deal, Beijing committed to follow through on previous pledges to strengthen legal protections for intellectual property rights and eliminate pressure on foreign companies to transfer technology to Chinese firms as a condition for market access.
China also reiterated pledges to refrain from devaluing its renminbi currency for competitive trade advantages, and vowed to improve foreign competitors’ access to its financial services market, in a bid to assuage longstanding American complaints of investment barriers walling off the country’s banking and insurance sectors.
“Much of what China has agreed to, such as on intellectual property protections, is in China’s interest as well. That will help global businesses competing in China and Chinese businesses,” said Steven Okun, a senior advisor at trade consultancy McLarty Associates.
Meanwhile, both parties have agreed to resolve differences through bilateral consultations under the deal’s dispute resolution mechanism. If the deal’s enforcement falls short or complaints go unresolved, a “snapback” mechanism allows the US to re-impose tariffs and other penalties on China.
“The deal is already being criticized by congressional Democrats, and I think there’s going to be some questions about how durable it is,” said Maruyama, who described China’s pledge to purchase $40 to $50 billion worth of US agricultural goods as “a tall order” given that US farm exports to Beijing previously peaked at $29 billion in 2013 and have never been higher since.
China’s agriculture purchases are what “President Trump really cares about and helped drive this thing,” he added.
“Lighthizer’s description of the [agriculture] deal was also somewhat different from the Chinese version and the two sides apparently are still working out the text. In trade negotiations, that’s where some of the underlying disagreements can resurface,” Maruyama said.
The former USTR general counsel described the snapback mechanism as “a clever way to skin the cat,” calling it a “dressed-up” version of Section 301, a statute in US trade law that allows the White House to probe and unilaterally act against countries it accuses of restricting access to American imports or using unfair market practices.
“It sounds like if we aren’t happy, we can just pop the tariffs back on. I doubt Lighthizer would agree to subject that decision to a bilateral dispute settlement mechanism or independent arbitration. That means he kept his leverage for phases two and three since if the Chinese stonewall he can stick the tariffs back on,” said Maruyama.
“But the Chinese also have their leverage since if that happens they can stop buying our soybeans, so this is just the beginning of a much longer and nastier negotiation,” he predicted.
James Zimmerman, a partner with the Beijing office of Perkins Coie LLP, a law firm, and former chairman of the American Chamber of Commerce in China, believes the Trump administration misjudged Beijing’s ability to withstand tariffs and brands the White House’s approach to trade diplomacy “wholly ineffective.”
“This phase one deal is an admission of a failed trade diplomacy strategy. The harm to the American economy during the trade war will never be offset by agricultural purchases, which would have been made without the trade war,” he said. “More progress would have been achieved by seeking to engage China and coaxing Beijing to continue down a path of reform.”
Zimmerman told Asia Times that the American business community would have been better served if the Trump administration completed the Bilateral Investment Treaty (BIT) negotiated by the predecessor Barack Obama administration and followed through on the Trans-Pacific Partnership (TPP) multilateral trade deal, which would have forced China to undertake substantial reforms to join.
Trump withdrew from the TPP in one of his first acts as president in January 2017.
“Now, [Trump] has nothing but purchases and still no greater market access that business desires. And purchases are managed trade, a policy failure and exactly what the US accuses China of engaging in. Trump is hypocritical for pushing purchases when, at the same time, we are trying to get China to wean itself off of state capitalism,” Zimmerman said.
By agreeing to roll back certain US tariffs currently in place, Okun remarked that the agreement constituted enough of a win-win for Chinese President Xi Jinping. But the McLarty Associates senior advisor said Trump’s “America First” trade policy has thus far achieved none of the structural reforms long sought by Washington and the US business community.
“The US most likely would be better positioned vis-à-vis China had the Trump administration worked with allies in a multilateral framework to address the core issues facing the global business community from China’s state-led industrial policy as opposed to imposing unilateral tariffs on Chinese goods,” he told Asia Times.
“Made in China 2025 is still in effect. Tariffs are still in effect. China’s Corporate Social Credit System goes into effect in 2020. This mini-deal does not create the level playing field global businesses need to compete fairly. And resolution of those issues is no closer today than it was pre-phase one,” Okun said.