US President Donald Trump and Chinese Vice Premier Liu Hei signed a “phase one” trade agreement on January 15, sealing a deal that will begin to ease an 18-month-old trade war between the world’s two largest economies, one that has rattled supply chains, roiled financial markets and cast uncertainty over the global economy.
“With this signing, we mark more than just an agreement. We mark a sea change in international trade,” said Trump in remarks delivered at the White House. “Together, we are righting the wrongs of the past and delivering a future of economic justice and security for American workers, farmers and families.”
China’s vice premier remarked that the deal was “mutually beneficial” and demonstrated the ability of the two countries “to act on the basis of equality and mutual respect.” Liu added that he hoped “the US side will treat fairly Chinese companies and their regular trade and investment activities” in the spirit of healthier Sino-US ties.
In a rambling address peppered with references to domestic partisan politics – Democrats in the US House of Representatives voted to send impeachment charges to the Republican-controlled Senate as the phase one signing ceremony took place – Trump said negotiations for a more comprehensive “phase two” deal would begin in the near future.
While the phase one agreement will gradually rollback US tariffs on certain Chinese imports, the trade war is far from over. Despite the truce, duties will remain in place on some US$370 billion worth of Chinese imports “because otherwise, we have no cards to negotiate with,” Trump remarked. “I will agree to take those tariffs off if we are able to do phase two.”
Analysts note that phase two will focus on forcing deeper, structural reforms of China’s state-led economic model, a much taller order than the largely purchasing commitments-oriented phase one accord. But even amid the deal-making fanfare, what exactly the two sides were signing wasn’t immediately clear.
Though details of the phase one deal had previously been outlined by officials from both countries, with China committing to large-scale deficit-reducing purchases of US farm products, manufactured goods, energy and services, the full text of the agreement was not published prior to the signing ceremony, in a break with usual practice.
Some believe such guardedness over specific terms of the accord is linked to phase one’s domestic political significance to both sides. For the Trump administration, the deal is widely seen as a boon to the president’s bid for re-election, despite the limited nature of the agreement and feasibility questions around Chinese purchase targets.
For China, which opted for a partial off-ramp to trade tensions against the backdrop of slowing domestic growth, closer scrutiny of the deal’s terms could further sour stakeholders over President Xi Jinping’s purchasing concessions to Washington and feed perceptions that Beijing caved to US pressure.
“There are elements of the Chinese commercial establishment – strong interest groups and state industry – that feel that they gave away too much,” Dane Chamorro, a former US diplomat and senior partner with risk consultancy firm Control Risks, said. “They feel like they were strong-armed or railroaded into something, even if the terms are reasonable.”
At the center of the phase one deal is a pledge by China to purchase at least an additional $200 billion worth of US agriculture over two years, touted as a boon for Midwestern farmers – a key constituency for Trump’s re-election campaign – who have thus far bore the brunt of supply chain adjustments wrought by “America First” trade policies.
Other Chinese purchasing commitments include an initial $54 billion in additional energy purchases, $78 billion in additional manufacturing purchases, $32 billion more in farm products and $38 billion in services. Checkbook remedies, however, will only serve as a temporary respite from the trade war, analysts say.
“It is hard to know the exact perceptions of Chinese leadership [but] the outcome of the deal cannot be too pleasing to China as Washington will retain existing tariffs on most of the taxed exports to the US,” said Zhang Baohui, a professor of political science and director of the Center for Asian Pacific Studies at Lingnan University in Hong Kong.
Duties of 25% will remain in place on $250 billion worth of Chinese industrial goods and components used by US manufacturers, along with a 7.5% levy on another $120 billion of Chinese goods such as electronics and apparel. Beijing didn’t commit to specific reductions of tariffs on over $100 billion in US goods under the agreement.
Far from the grandiose win trumpeted by the US president, critics of the trade war point to mounting bankruptcies among US farmers stung by lost access to China’s markets, higher input costs for US manufacturers and evidence that tariffs on Chinese imports have so far cost American companies some $46 billion.
“President Trump’s failed China strategy has inflicted deep, long-term damage to American agriculture and rattled our economy in exchange for more of the promises that Beijing has been breaking for years,” said Democratic House Speaker Nancy Pelosi in a press statement lambasting the accord’s “absence of concrete progress, transparency or accountability.”
A phase two deal is being promised as a remedy to the thornier and more substantive issues that certain elements of the US administration and their critics across-the-aisle have with Chinese industrial policies, procurement rules, product standards, subsidies to state-owned enterprises (SOEs) and sensitive non-tariff barriers.
“As far as phase two is concerned, I don’t think anybody on either side is harboring any illusion as to how difficult this is going to be, and depending on what’s included, how long that process could take,” Chamorro told Asia Times. “That’s where the rubber really hits the road, if you will, in terms of the systemic clash between the US and China.”
The former US diplomat believes “China is never going to budge” on issues deemed as critical to the country’s state-led growth model and strategic economic blueprint.
“I think one of the misperceptions we have is this belief on the US side that with enough pressure China will change its model, which is just fundamentally incorrect,” he said.
“China’s political system is deeply linked to its economic model,” said Zhang. “If [the US] wants to dismantle China’s state capitalist model, for example by severing relations between government and SOEs, then Washington may threaten higher tariffs again. That would rekindle global anxieties and also make the next phase agreement difficult.”
Zhang told Asia Times that Beijing understands the US will continue to tighten controls on the export of technologies to China, which he believes may still make a “decoupling” scenario likely.
“If Trump is re-elected, some in his government may pursue greater decoupling of the two economies for geopolitical reasons. In that case, the Cold War scenario will fully materialize,” the Chinese academic said. “This is not what China wants. It believes that close economic connections, even though fraught with conflicts, help stabilize geopolitical rivalry.”
Chamorro believes that Beijing is underestimating the degree of anti-China sentiment in Washington and views the trade dispute as a limited political gambit by the Trump administration rather than an across-the-board, whole-of-government shift in attitude toward US dealings with the world’s second-largest economy.
“The US-China bilateral relationship has over the 30 years been one generally of cooperation with episodes of disagreement. The future is going to be the opposite,” Chamarro predicts. “It’s going to be a relationship that is largely characterized by disagreement and friction where there are episodes of agreement.
“This is an across-the-aisle, across-government, across-industry, and I even now say across-society, type of adversarial relationship. I don’t think either side, certainly not the American commercial, business, economic side, and certainly not the Chinese side, have really factored that into future plans and behavior,” he said.
Whatever the phase one accord’s shortcomings, the US-China ceasefire has added helped to buoy an otherwise uncertain global economic outlook. The World Bank’s latest projections for the global economy in 2020 are unmistakably gloomy but predict a modest rebound in growth of 2.5% compared to a 2.4% estimate for 2019.
In its latest biannual Global Economic Prospects report, the multilateral lender noted that the world economy remains vulnerable to geopolitical tensions and a potential re-escalation of the trade war, hence expectations for the weakest growth since the 2008-9 global financial crisis.
“The lag effect of all those tariffs already in place is still working its way through various economics, through consumption and exports, etcetera. That could still continue to weigh pressure on regional economies,” said Song Seng Wun, an economist with CIMB Private Banking in Singapore.
“If the external environment proves to be more challenging than what was being forecasted by the World Bank, obviously downward pressure continues,” he told Asia Times. “Assuming there are no external shocks, and if there are no new tariffs, perhaps the second half of the year, all things being equal, will be slightly less bad.”