Author : Manoj Joshi

Expert Speak Raisina Debates
Published on Dec 20, 2019
One step forward, two steps back: Leninist outcome of the US-China Phase-1 trade deal?

China seems to have decided that discretion was the better part of valour. This emerges from reading the tea leaves relating to the Phase 1 deal the US and China have announced after a 19-month standoff relating to trade and tariffs.

As of now few details are available but there is a clear sense from the official comments and references to the Phase 1 trade deal that could be signed as early as January 2020,that the Chinese have taken the steps back in order to buy time and prevent relations with the US from sliding down further. This could also represent a Chinese assessment that handing Trump a victory at this juncture is the prudent thing to do, given the fact that he seems set to win a re-election next year.

A fact sheet issued by the USTR office says that the two countries had reached “an historic and enforceable agreement” on a Phase 1 trade deal “that requires structural reforms and other changes” to China’s economic and trade regime in a range of areas from Intellectual Property to currency and foreign exchange. The agreement also commits China to make “substantial additional purchases” of US goods and services.

There has been no official pronouncement from China, though Xinhua has noted that the text includes nine chapters that include Intellectual Property, technology transfer, food and agriculture products, financial services, exchange rate and transparency, trade expansion, bilateral assessment and dispute settlement. The Chinese news agency added that the agreement was “generally in line with the main direction of China’s deepening reform and opening up as well as the internal needs for advancing the high quality economic development.”

Given the protracted struggle between the two sides, it is not surprising that questions are being posed as to who won and who lost. It needs to be emphasized that this is just Phase 1 and a long road lies ahead in terms of implementation and enforcement of the provisions announced. There is a price already paid  by US companies that import parts and finished products from China and who have already paid $ 40 billion in additional taxes since Trump imposed his first tariffs. While most studies note that it was US companies and consumers that paid the price of the tariffs, Trump maintains that it was China that paid the price. Many US economists say that the trade war damaged the US economy and the impact was, paradoxically, felt by the manufacturing sector.

The US had set off on the course of imposing tariffs on Chinese imports with a view of reducing, if not eliminating, its trade deficit with China. Going by numbers, the US is the loser. As Paul Krugman pointed out, the trade deficit with China “has risen, not fallen on Trump’s watch” and is now $691 billion in the 12 months that ended in October as against $ 544 billion in 2016. He also notes that where the US wanted to “close the trade deficit in manufactured goods,” the current deal is touting its success in forcing China to accept more agricultural products.

Reports suggest that the deal could include Chinese purchases of $40-50 billion worth of US agricultural commodities. According to Andy Rothman, an investment strategist, the goals of US agricultural exports to China are “unrealistic” and, perhaps of greater concern, there is no indication that the two sides want to use this Phase 1 process to arrive at a larger settlement that will prevent decoupling of their economies and a wider global economic disruption.

Analysts like Derek Scissors of the American Enterprise Institute disagree with those who feel that nothing has been achieved in the Phase 1 deal. He says that this is a small deal, which is not necessarily bad. The important point, he said, is that the US has not given up leverage and can respond quickly to Chinese foot-dragging. In his view, there is a lack of realism in the outcomes as indicated so far.

One of the areas he finds problematic is that of technology transfer. In his view, China is unlikely to change its behavior in relation to coerced technology transfer. The second issue is the expanded trade of $246 billion in the next year and $ 326 billion in 2021. Considering that the trade was $ 186 billion in 2017 and expected to be $169 billion in 2018, it is doubtful if the US has that many goods and services to export. Perhaps expectations are in the area of financial services where the PRC is committed to lowering the barriers. Beijing does have a debt problem and needs foreign money to deal with it.

On the other hand, there are suggestions that the Chinese side is not over-doing the publicity on the deal because there are some elements in their system who are not happy with the deal. Chinese commentators like the authoritative and anonymous Taoran Notes blog has not commented on the deal since November 5 suggesting an official shut down of dissenting voices on the issue.

In return for the detailed Chinese commitments, all the US will do is to cancel planned tariff increases, but will maintain 25 percent tariffs on approximately $ 250 billion worth of Chinese imports, along with 7.5 per cent on some $ 120 billion of Chinese imports. It should be emphasized that as of now we only have the bare bones of the deal whose text could run into hundreds of pages and which could be operational by February 2020. As such, we have much more from the American side, given that they have issued a fairly detailed fact sheet and their trade negotiator has explained the deal on the media. From the Chinese side we have little beyond the news agency statement cited above.

Given the ambitious US agenda of not only achieving a trade balance with China, but to change the course of  country’s highly successful industrial policy, it would indeed be surprising if the US could have achieved all its goals in one deal. But Scissors is right in that, as a path has been set, and there are enough safety clauses built into the agreement to ensure that there will be some sort of compliance.

According to the US fact sheet,

  1. China will address “long standing concerns in the area of trade secrets, pharmaceutical-related IP, geographical indications trademarks, and enforcement against pirated and counterfeit goods.”
  1. The Technology Transfer chapter has laid out “binding and enforceable” obligations to address concerns over unfair Chinese practices. Beijing has agreed to end its practice of forced tech transfer and also its directed outbound investment aimed at acquiring foreign tech firms “pursuant to industrial plans that create distortion.”
  1. The Agriculture chapter tackles the issue of structural barriers to trade and will result in a “dramatic expansion of US food, agriculture and seafood product exports.” In the area of Financial Services, China had agreed to address a number of long-standing trade and investment barriers to US banking, insurance, securities and credit rating services.
  1. The Chinese have also agreed to address unfair Currency Practices by refraining from competitive devaluation and targeting of exchange rates.
  1. The Expanding Trade chapter commits China to sharply expand its import of goods and services from the US over the next two years by no less than $ 200 billion over the 2017 figure.
  1. Finally a Dispute Resolution chapter sets forth arrangements for the effective implementation of the agreement and to resolve disputes quickly.

In an interview, US Trade Representative Robert Lighthizer, confirmed that the US expects to double its exports to China in the coming two years and the target levels of different sectors will be part of the deal. In 2017, the US exported goods worth $ 128 billion. Of the increase, some $ 40-50 billion will be in agricultural goods. He has also noted that this is only the first of several phases and can, at best, be described as a “partial victory.” He acknowledged that the tough task of integrating two very different systems is not going to be easy.

As is well known, the issue of trade and tariffs had been overtaken in some ways by the issue of technology transfer. Not surprisingly, the more problematic issues of the Phase 1 deal could relate to navigating the differences between the two countries on this issue. That is why it is not clear as to whether the US will relent on its pressure on Huawei. Indeed, according to reports, the US is now pushing for new limits on the sale of chips and other vital components to the company. Leading the charge against this policy change are US chipmakers, software companies and manufacturers who stand to lose valuable business. The Administration is doing this to close the loopholes that were being used by US companies to continue selling to Huawei.

Meanwhile there is better news for China on another technology front with the US — this relates to the rules the US has been mulling for the past two years on what are called emerging technologies.

Under the 2018 National Defense Authorisation Act for 2019, (NDAA) US was prohibited from procuring components and equipment from Chinese firms like Huawei, ZTE, Hytera, Hikvision and Dahua. As part of the NDAA, the Congress also enacted an Export Controls Act of 2018 calling for greater restriction on the so-called foundational technologies. Now the US Commerce Department is finalizing the rules to limit exports of these technologies. According to Reuters, the Commerce Department approach is seeking to restrict technologies like quantum computing and 3-D printing and leaving out a number of others like AI and robotics. Earlier there were worries that a broad brush approach would negatively impact on US companies.

Even as trade, technology and tariff issues get tangled and untangled, there is another front that could open up in the US-China “war”. This is in the area of finance. As in technology, finance is one area in which the US is a global hegemon and uses that power to extend its political hegemony around the world. As in the area of technology, finance is an area where the Chinese would like to de-risk themselves from the US connection. And again, as in the area of technology, the US needs to ask itself, whether it is in US interests to encourage China to adopt a path of avoiding US dominance. At the end of the day, the Trump disruption has helped China to understand that it is far too dependent on the US in a range of areas from technology to finance. What it will seek to do in the coming years is to buy time to reduce this reliance on the US.

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Manoj Joshi

Manoj Joshi

Manoj Joshi is a Distinguished Fellow at the ORF. He has been a journalist specialising on national and international politics and is a commentator and ...

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