The US and China Phase 1 Trade Agreement – All That Glitters Is Not Gold

On 15 January, after 18 months of a trade war with China, United States President Donald Trump and Vice Premier Liu He of China signed a “Phase 1” trade agreement. Treasury Secretary Steven Mnuchin proclaimed this as a “big win” for the president but also acknowledged that this phase did not achieve all of the reforms they had sought.

The trade war has had a profound impact on both countries and this agreement is believed to be the first step towards creating a more level trade environment between the two countries. Yet as the fanfare fades on phase one and the details begin to emerge there is some scepticism as to what was accomplished.

In December of 2019, in anticipation of this phase one, President Trump decided against imposing additional any further tariffs on China. He decided against adding $160 billion of goods from China for items such as cell phones and laptops but changed his mind, just in time for the holiday season. The United States also slashed the tariff rate in half for $120 billion worth of goods from 15% to 7.5%.

However, 25% of tariffs are still in place for some items that the United States buys from China. Much of those tariffs are attached to components that American manufacturers need to assemble and complete their products in the United States. The issue with these tariffs remaining is that American manufacturers have been one of the more affected sectors in America not only since the trade war but for years now. In response to this, President Trump claims that China is paying those tariffs but studies have found that these costs are largely paid by American importers.

As part of this first agreement, China has agreed to increase its purchases of goods and services from the United States by more than 50% over the next two years. This includes $38 billion in services, $52 billion in energy products, $78 billion in manufactured goods and $32 billion in agriculture.

Farmers, particularly those in the American Midwest, have been hurt by the trade war. Due to the lack of Chinese demand and low prices, many farmers saw a decrease of close to 50% of the value of their crops. While some of that loss was offset by federal aid, it hasn’t lessened the overall impact. It’s thought that the billions in agriculture that China has promised to purchase will turn that industry around.

As Minnesota soybean and corn farmer Kristin Duncanson said in a recent NPR interview: “We’re optimistic that signing the agreement will reopen opportunities…But I’m also a realist enough to know that until the beans are actually shipped to customers that we can’t count our chickens before they hatch.”

One of the more contentious issues in the trade war surrounded intellectual property rights. A particular irritant for American tech companies that wanted to do business in China, they were required to provide access to their intellectual property. The Chinese government claimed to do this under the auspices of market access and licensing approval. The reality is that Chinese tech companies would co-opt and re-produce that intellectual property and then undercut the American tech companies.

It’s more than likely that this will remain a troublesome issue between the two countries because China has only agreed to strengthen legal protections for patents, trademarks, and copyrights. To combat pirating of movies, games, and software, China has also conceded to improve “criminal and civil procedures to combat online infringement of pirated and counterfeit goods.”

As world leaders gathered in Davos, Switzerland for the World Economic Forum, many trade experts say this first phase of the trade agreement was made to ease tensions. Mexican economic minister Graciela Marquez Colin said this deal is an “intermediate step.”

While in Davos, Chad Brown, and Jin Keyu, among others, point out the primary danger of this trade agreement is the impact on the global market. For China to meet its obligations with the US, it will inevitably shift purchases from other countries.

Brown, a senior fellow at the Peterson Institute for International Economics, spoke bluntly and has called the agreement a “disaster” and that it doesn’t address any of the “systemic issues.” Keyu, associate professor at the London School of Economics supported Brown: “You can have Chinese people buying more US goods and somehow the Chinese consumers will have to absorb the 2.4 billion dollars of American nuts and say goodbye to New Zealand, Australian suppliers…”

The baseline year for the agreement is 2017 in which the US share of China’s imports was 9% in those target categories (services, energy products, manufactured goods, and agriculture). According to Bloomberg Economics, that would almost double the US share by bumping it to 17%. Countries like Angola, the Republic of Congo and Mongolia derive 57%, 49%, and 47%, respectively, of their sales to China and would be profoundly impacted by the doubling of the US share.

Many world economic experts agree that the most difficult trade negotiations between the US and China have yet to begin. However, in spite of that and the potential global concerns since the 15 January signing and at the World Economic Forum, the head of the World Trade Organization, Roberto Azevedo said: “The political impact of (the phase one deal) cannot be underestimated.”

China has agreed to almost all of America’s demands for this first phase. During his visit to Davos, the Chinese malleability prompted President Trump to boast that while the deal is around $200 billion the number of purchases could end up closer to $300 billion. Of course, this would be contingent upon China following through and adhering to the agreement. And if they failed to do so, properly enforcing the agreement.

This enforcement is important because while China has agreed to end the forced technology transfer to market in China and agreed to strengthen intellectual property protections…they’ve agreed to this before.

The administration and adherence to the trade agreement are paramount to its success. According to the American Action Forum: “Any trade deal is only as good as its enforcement mechanism.” Traditionally, trade disputes have been handled by a neutral panel of experts, not the trade negotiators from the countries involved.

In this phase one agreement, the two countries have created a new resolution system. They’ve decided to resolve any issues on their own. Unfortunately, neither China nor the United States has been fond of resolutions, it’s one of the reasons the trade war lasted 18 months.

As the second-largest economy, behind the US, China has proven to be a formidable foe and that they won’t be bullied. What this means is that if there is a dispute after this first phase is implemented is that the most likely recourse will be more tariffs…or complete withdrawal by either country.

A source close to the Ministry of Commerce was quoted by the Global Times, a tabloid under the official newspaper of the Communist Party of China, People’s Daily: “We can’t expect that the China-US trade fiction will disappear simply because of the signing of a deal.” It was also intimated that it will lead to negotiations toward the next round of agreements any time soon.

The phase one agreement goes into effect on 14 February and has many economists, politicians, manufacturers, and farmers anticipating what the outcome and impact will be.

With that said, one immediate outcome is that phase one signing has emboldened President Trump. The president has now set his sights on the European Union. Trump has threatened the EU with tariffs on the bloc’s auto imports if it does not bend to Washington’s will. In an interview with CNBC, Trump said that the European Union will “have no choice.”