China and the United States conclude their first ad hoc Trade Deal
On 15 January 2020, US President Donald Trump signed a partial trade agreement with China. It is designed to contain the fallout of a more than 18-month long trade war between Washington and Beijing and to correct certain Chinese practices, such as intellectual property theft and forced technology transfers.
The main points in this agreement are the following:
China undertakes to increase purchases of American manufacturing, energy and agricultural goods and services by at least $200 billion over two years.
There are provisions to boost Chinese market access to financial services firms.
China is called upon to submit an “Action Plan to strengthen intellectual property protection.” This should include “measures that China will take to implement its obligations” and “the date by which each measure will go into effect.”
Companies should be able to operate “without any force or pressure from the other Party to transfer their technology to persons of the other Party.”
Technology transfers “must be based on market terms that are voluntary and reflect mutual agreement.”
The sale of counterfeit goods should be rooted out.
The Trump administration revoked its decision to label China a currency manipulator.
What will the effect on bilateral trade and tariffs be? The Trump administration agreed to cut duties on $120 billion in products to 7.5% but will leave tariffs on another $250 billion in Chinese products in place for now. The US Treasury Secretary Steven Mnuchin said a second phase of the agreement that the US hopes to strike could include more tariff relief.
Experts think that an increasingly volatile situation might be contained but point out that much of the high tariff infrastructure of the US remains in place. For instance, a 25% levy by the US on $250bn of Chinese goods – mostly parts for goods assembled in US factories – remains in effect. The average tariff on Chinese goods will fall to 19.3% – which is more than six times what it stood at before the trade war began in 2018.
It is now clear that a trade war such as this one has unpredictable consequences. President Trump suggested, when announcing the first round of tariff increases on Chinese goods, that there would be a boost for domestic firms and major costs to China. However, US manufacturing did not benefit as predicted. There have been job losses and signs of a recession. And China did not suffer as expected, while little improvement on the most important systemic issues followed. Trade wars on this scale (these are the biggest global economies) cause a lot of disruption and pain, without resulting in dramatic change. One of the explanations is the fact that these are two very different systems. China’s communist regime has global political power ambitions which will not be abandoned and it enjoys vast powers to steer and control its domestic economy and its market. It is not exposed to the consequences which an open and liberal economy would suffer.
How will this deal be enforced? The US Trade Representative Robert Lighthizer told reporters that the agreement has “real teeth” to address China’s trade practices, and that additional American tariffs on Chinese goods will help the administration to enforce the accord. However, this looks like a self-refuting strategy. If the objective is to bring about peace in a trade war which has been precipitated by the unilateral introduction of tariffs on Chinese goods, new “enforcement tariffs” will directly undermine any hope of a truce. This partly explains the underlying dilemma; these two nations are not only engaged in direct and fierce competition; they pursue their goals through very different principles and economic systems, while their bilateral battle is fought outside the rules-based system of the WTO. However, the damage and the fallout will not be limited to their respective domestic economies
These factors cast a shadow over the future of Chines-American bilateralism. The Trump administration has high hopes about follow-up deals (this first one is referred to as a Phase I agreement) but it is important to note that this is a sui generis bilateral deal (not a legally enforceable agreement) which is about more than ‘ordinary’ protectionism. President Trump’s unpredictability, especially in an election year, is another concern. His attacks on several features of the post second world-war international order suggest an ongoing battle with unpredictable consequences. He has indicated that European trade practices might be in his crosshairs and that currency “manipulators” will soon be targeted
The American concerns about systemic issues regarding the functioning of the WTO (which include global Chinese trade practices) remain on a different agenda. The US still refuses to agree on new appointments to the Appellate Body of the WTO and is pushing for far-reaching reform of the multilateral trade system. (See this Newsletter’s discussion of developments around the Appellate Body.) With Washington and Beijing at loggerheads the prospects for a bigger and lasting deal, in the corridors of the WTO headquarters in Geneva, look increasingly slim.
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