US-CHINA TRADE DEAL

After nearly two years’ trade talks, the world’s two dominant economic powers, the United States and China, have signed an initial trade deal that will roll back some tariffs and boost Chinese purchases of US goods and services. Through the “Phase One” deal, which was signed in Washington on January 15, the Trump administration aims to resolve some longstanding American concerns about Chinese trade abuses. Although the centrepiece of the deal is a pledge by China to purchase at least an additional $200 billion worth of US farm products and other goods and services over two years, over a baseline of $186 billion in purchases in 2017, the accord appears to leave questions about how Washington and Beijing will enforce its terms and prevent further tensions. Some of the commitments contained in the 86-page document, which has eight chapters and a preamble, echo previous pledges made by China at the WTO or in G20 summits, and repackage steps Beijing had already been taking towards more open markets. Cybertheft by China as well as its use of industrial subsidies and its barriers against some US technology investments have not been addressed.

To critics, the scale of China’s concessions has not been worth the pain and disruption wrought by the trade war. Many observers were cautious about the outcome.

But the view among members of the Trump administration and those close to the White House is that they managed to achieve more than previous administrations, and not much less than what they had set out to do when Donald Trump was elected.

Below is a breakdown of the different chapters of the trade agreement and what they say:

Intellectual Property

China agreed to beef up its intellectual property protections in several ways to make it easier for US companies to seek recourse in both civil and criminal proceedings for the theft of trade secrets, without disclosing confidential business information. The deal also includes stricter measures related to patents, trademarks and geographical indications to prevent piracy and counterfeiting.

Although these measures apply to digital infringements, critics say this chapter addresses many “20th century” IP issues with China but fails to tackle the current era’s most pressing problem, as China did not make any sweeping commitments to combat cybertheft.

Technology Transfer

China pledged not to force US companies to hand over their technology to its authorities in exchange for access to its market—a commitment it made when it joined the WTO, and then repeatedly violated, according to US officials. In the deal, China said it would not force US companies to hand over technology in M&A and investment transactions when seeking licensing or other administrative approvals.

Food and Agriculture

China agreed to loosen some long-standing barriers to trade in food and agriculture—mostly related to health standards—that had applied to products including infant formula, poultry, beef, pork, rice and pet food. It also makes it easier for US grain producers to obtain biotech-related approvals for genetically modified crops. The relaxing of these barriers should make it easier for US farmers to export more goods to China—which is the subject of another chapter in the agreement.

Financial Services

China has pledged a series of measures to open its financial services sector to US competition, in areas ranging from banking services to credit ratings, electronic payment services, asset management and insurance. The US has also made some reciprocal promises to allow some Chinese financial services to receive non-discriminatory regulatory treatment in the US. This could ease fears that the US-China trade war will lead to a decoupling in capital markets, and ensures Wall Street’s support for the deal.

Macroeconomic and Exchange-rate Policies

Both the US and China largely reaffirmed pledges made to the G20 and IMF not to devalue their currencies to benefit their exporters, in order to maintain a market-based exchange rate, and to publicly disclose their foreign exchange positions.

They specifically noted that any alleged violations of the terms of the deal would be subject to enforcement, which could mean invoking consultations with the IMF or even imposing unilateral tariffs.

Purchases

Given Donald Trump’s fixation with reducing the trade deficit, Washington was consistently pushing for China to substantially increase its purchases of US goods and services. In the end, China agreed to buy $200bn more in US goods than it did in 2017, the baseline before the start of the trade war, over the course of two years.

The two-year total includes $77.7bn in additional manufacturing purchases, from aircraft to cars, iron and steel to machinery and pharmaceuticals. It also includes $52.4bn in purchases of energy products, like crude oil and liquefied natural gas, and $32bn in purchases of farm goods including oilseeds, meats, grains and seafood.

The agreement specified that purchases “will be made at market prices based on commercial considerations” and that “market conditions” would affect the timing, language that sowed doubts in agricultural markets and sent the price of US soyabean down 1.4  percent.

The deal also allocates $37.9bn for the purchase of services, such as cloud computing, financial services, travel and tourism.

Dispute Settlement

The Trump administration wanted a mechanism to ensure China abided by its commitments. The agreement creates a framework for top officials from both countries to meet regularly to try to address alleged violations. But if the dispute is not resolved after meetings involving China’s vice-premier and the US trade representative, either side can impose punitive measures, such as tariffs, without a “counter-response,” as long as the action was taken in “good faith.”

Rolling out this system could be challenging. Although confidentiality is supposed to be guaranteed, US companies might be hesitant to lodge a complaint against Chinese officials that risks reopening the trade war.

Formalities

The last chapter of the trade deal includes formalities such as the deal coming into effect 30 days after it is signed and giving the US and China the right to scuttle the agreement within six days. It also states that Washington and Beijing will agree on the timing of new negotiations—although no time line is given.

US and Chinese officials have said they were ready to begin a second stage of talks, which could lead to further tariff reductions. But there is no clarity on whether any deal will be reached by the November 2020 election—which could see Mr Trump replaced in the White House, or be rewarded by voters with a second four-year term.

Analysis

China promised a $200 billion increase in purchases of US goods and services over two years. China’s trade surplus with the US is indeed too large. Much of China’s foreign currency has been spent on purchasing US treasury bonds. This is not an ideal trade-financial structure in the long run. Moving toward a trade balance is a healthier direction for China-US economic cooperation.

Because of China’s enormous trade surplus, the US has used it as a political weapon against China. Expanding the amount of imports from the US is a process to dismantle this weapon. The increase in Chinese imports from the US means that more weapons to counter the US will be held in US hands.

In the past, China imported more than $20 billion worth of agricultural products from the US in one year. When China suspended purchasing those goods, it exerted great political pressure on the US. When China’s purchase of these items reaches over $40 billion, the US will be further tied up.

China needs to work hard to implement the additional $200 billion in imports from the US in the next two more years. The US should also cooperate fully to provide products that the Chinese market really needs and are competitive in price.

China is already a market economy. Most import companies are private, and many are foreign-funded. The Chinese government cannot give orders to these companies. In addition, consumers will not buy products out of political considerations. The US is clear about all of these facts.

If the US sells its products by force, and the Chinese government buys useless products, then high-quality products from other markets such as Europe, Japan and Southeast Asia are squeezed out of the Chinese market. This would violate the WTO rules.

Therefore, substantially increasing China’s imports of US goods can be a greater challenge to the US than to China. If US companies cannot deal with the challenge, US President Donald Trump’s negotiating team will not save them.

Others are worried that China’s economic growth is slowing down. So, where can the country find the market after expanding imports? This is the point which China needs to push itself. As long as it can further expand its consumer market, with its economy performing in a normal way, it can accommodate these expanded imports. The yuan will likely gain against the dollar in the next two years. This will make it easier for China to expand imports from the US.

The Phase One trade deal is consistent with the general direction of China’s reform and opening-up. The deal promotes a China-US trade balance, strengthens intellectual property protection and creates a more favourable environment for external investment, which are the directions that China must stick to during its opening-up process. The trade war is pressure, but China should try to turn it into a driving force to comprehensively deepen its reform and opening-up.

Some argue that China should have accepted all the US conditions from the very beginning. This is naïve.

During the 22 months of the trade war, China responded to the US attempt to make China give up high-tech development, and made the US understand that China is not the one to be trifled with. Neither the EU nor Japan has the courage and ability to compete with the US. This will increase US expectations that China will fight back when faced with radical US policies against China.

China, at such a strategic position, is doomed to face difficulties. It should wisely and firmly deal with the uncertain China-US relations.