17 January 2020   Leave a comment

The US and China have signed a “Phase 1” trade deal which, according to the State Council of the Chinese government will include the following:

“China and the United States have agreed on the text of a phase one economic and trade agreement based on the principle of equality and mutual respect.

“The text includes nine chapters: the preface, intellectual property rights, technology transfer, food and agricultural products, financial services, exchange rate and transparency, trade expansion, bilateral assessment and dispute settlement, and the final terms, according to a statement issued by the Chinese side on Dec 13.

“Both sides have reached consensus that the US side will fulfill its commitments to phase out its additional tariffs on Chinese products, so as to achieve a switch from hiking to cutting additional tariffs.”

The agreement avoids the tariffs US President Trump had threatened to raise, but leave the already existing tariffs in place:

“While threatened tariffs on finished consumer goods such as clothes and electronics were avoided, the deal also reaffirmed the White House’s commitment to tariffs as an enforcement mechanism, leaving in place sanctions on $370 billion worth of Chinese imports for the foreseeable future.

“This gives American buyers of those goods — primarily parts for items made in the U.S. — a greater degree of certainty in their input costs, albeit not in the direction they wanted. Trade analysts said this means companies facing higher input costs would probably begin passing those along to consumers in the form of higher prices, if they had not done so already.”

The deal leaves a lot undetermined. China made promises on protecting intellectual property, but it made exactly the same promises when it joined the World Trade Organization in 2001. Similarly, the Chinese have promised to purchase US agricultural exports, but added an important caveat that those purchases depended on market conditions. And the enforcement of all the Phase 1 agreements is bilateral, not multilateral. That means that if there is a dispute about adherence to the agreement, the only enforcement mechanism is the threat of additional tariff increases or other constraints on trade. In short, it is not clear that the Phase 1 agreement really addresses the central issues that started the trade war in the first place.

It should have been obvious that the Chinese were not enthusiastic about the deal. President Trump had indicated earlier that he expected President Xi Jinping to sign the agreement and that the signing would be held in Beijing. Instead, the agreement was signed by Vice-Premier Liu He in Washington, DC which allows President Xi to override the agreement if he deems that action necessary or desirable. The two-year trade war does not appear to have accomplished much and that failure stems from a misunderstanding of the Chinese economy by the US. Zachary Karabell explains:

“The United States has fundamentally misread the relative strengths of both itself and China. It has acted as if Chinese exports to the United States are the key driver of the Chinese economy and hence tariffs are a potent weapon. As underscored by a recent McKinsey study, in fact, China has been aggressively, purposefully and successfully shifting from an export-driven economy to a consumer-driven one. Much of the gain of exports accrues to the multinational companies that source in China and not to the domestic Chinese economy, and more and more Chinese manufacturing activity is geared toward its own vast internal ecosystem. Tariffs certainly stung, but their greatest impact was not economic but rather as a signal to Beijing that the United States was no longer a reliable economic partner.”

It seems safe to say that a pause in the trade hostilities is a welcome step. But it is hard to make the case that the trade war has really accomplished much, and the mutual suspicion between the US and China has only deepened because of the dispute.

Posted January 17, 2020 by vferraro1971 in World Politics

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