US-China Trade Deal: Not Much Win-Win; Not Much Loss-Loss

Screen grab or Annex 6.1 of US-China phase one economic and trade agreement, January 2020.

FROM THE SIGNING ceremony and the detailed text, this Bystander takes two overarching points from the new US-China phase one economic and trade agreement.

First, the agreement will work as long as China decides to make it work, and the deal provides a stick for the United States to help Beijing keep its mind resolved. Second, the biggest risk may be that what US President Donald Trump tells himself China has committed to do under the deal is different from what China thinks it has. Or, indeed, based on Trump’s inflation at the signing ceremony of the agreed numbers for Chinese imports of US goods and services over the next two years, what the agreement says.

For all the talk of this being an equal agreement, most of the commitments to action fall on China: the text contains 20 times as many ‘China shall’ as ‘the United States shall’ (h/t to Sinocism for that tidbit). That said, commitments and concessions are not the same, and what concessions there have been on both sides are small, even if China, on balance, made more and still faces tariffs on the majority of its exports to the United States.

However, over two years of intensifying tariffs pressure, Beijing successful resisted US attempts to make fundamental structural changes to its economy, which may be its biggest win of all.

Most notable among the ‘China shalls’ is strengthening its intellectual property protection, including providing better legal remedies to aggrieved foreign companies, and greatly increasing its imports from the US over the next two years.

The latter is largely a question of money and capacity to absorb the imports, plus dismantling non-tariff barriers.  One set that will go immediately pertains to low-risk foodstuffs, which will be able to be imported requiring only US Department of Agriculture health and safety certifications.

The former is the direction that China’s economic reformers are headed regardless as they move the economy up the value chain, resulting in more Chinese companies with intellectual property to protect and brands to defend from counterfeiting and piracy.

The same is true for pharmaceutical and financial-services market opening, and for the commitment not to devalue the currency competitively.  Even in the area of agriculture and food, the changing expectations and appetites of middle-class consumers for a safe, varied and international diet makes 1970s-90s-era protectionism for farmers as outdated as it is in most countries.

In that sense the, new agreement pushes on an open door, at least at the national level. Implementation will be key. Local government can be more recalcitrant and inconsistent, but the new Foreign Investment Law takes that on, as it does another long-standing complaint of foreign businesses, forced technology transfer, now explicitly forbidden.

If we set aside the loopholes, those are two ‘deliverables’ in the new trade agreement already delivered, as are many of the other commitments. That prompts the thought that this is a deal that could have been papered much earlier, saving many months of tariffs-induced pain on both sides.

There is no doubt that there are many cracks through which implementation could fall, intended or otherwise. That is where the stick comes in. Including an enforcement mechanism in the agreement was non-negotiable to the United States.

Part of that is just greater transparency required of China. It will need to provide regular reports of enforcement actions over IP infringements, institute a mandatory 45-day public comment period for all changes to IP rules and regulations, and present by mid-March an ‘action plan’ with deadlines for further IP protections. That will be more sunshine than to which many are accustomed.

But the heart of enforcement will both sides having compliance teams charged with monitoring the other side’s implementation and then resolving any disputes where one side feels the other is falling short.

The text offers little insight into how the monitoring will be done. There will be regular meetings between the staff of the two compliance teams, but points of complaint will likely have to come into each team from companies. That may test some companies’ willingness to put their heads above the parapet.

It will be up to each team to investigate complaints brought against their country. Resolution is to be reached by consensus within set deadlines. If it cannot be achieved, the complaint gets escalated up the chain of command. If it reaches the highest political level (a designated vice premier and the US Trade Representative) still without resolution, the aggrieved party can take punitive actions (e.g., slap on tariffs) without fear of retaliation.

If it believes the other side has acted in bad faith, it can withdraw from the agreement unilaterally. Either side can end the agreement with 60-days written notice. A Trump tweet will be the perennial wild card.

This procedure looks rickety. It has the feel of an effort by the Chinese negotiators to insert as much process into disputes resolution as possible short of denying the Trump administration the ability to restore tariffs unilaterally if the US president takes it into his mind that China is no longer adhering to the agreement. If he can say he can do that, he probably does not care too much about the rest of the details.

The mechanism may get to November this year unscathed. However, it would be a bold Bystander who would bet on it getting through another four years after that, especially if the incumbent US president is re-elected to office.

As has been noted here and widely elsewhere, phase one tackles a limited range of the issues at dispute between the Trump administration and Beijing. Unresolved and probably intractable fundamental differences over China’s state-led economic model, including government support for Chinese enterprises, indigenous technology development under Made in China 2025 and cyber theft, are deferred to Phase Two.

That will start, Trump says, as soon as he visits Beijing soon. However, it is unclear when substantive negotiations will start and even less so when they will conclude, if ever. China is in no hurry on either front.

It may be that the only way forward will be small, issue-specific settlements. It  remains hard to envision a comprehensive phase two acceptable to the United States that would not undermine the Party’s monopoly grip on power, equally unacceptable on the other side.

Meanwhile, one way we shall amuse ourselves is by filling in the blank order grid in the agreement (see screenshot above) for the $200 billion of additional US imports China promises to buy this year and next over and above the baseline level of 2017’s imports, the last year before the tariff wars.

We have the high-level numbers for the four categories, manufactures, energy, agriculture and services, but no details. These are being kept secret to avoid price and supply distortions in the market, it is said. We suspect there is still work being done on the final numbers down in the bowels of the international trade categorisation system at the six-digit level, and on China’s capacity to absorb such an increase in imports over that relatively short time.

One question the text of the deal has answered, however, is on how the agricultural imports numbers will be got to add up to their targets. The answer is that ethanol purchases will count under agriculture. US ethanol is produced from corn.

China, too, converts some of its corn stockpiles into the fuel. Like their US counterparts, Chinese farmers will now have to start making calculations about how much acreage to plant in the light of the import targets and how much to devote to soy in the face of falling demand for soy meal for hog feed because of the African swine fever epidemic. Such are the real calculations of trade wars.

2 Comments

Filed under China-U.S., Trade

2 responses to “US-China Trade Deal: Not Much Win-Win; Not Much Loss-Loss

  1. Pingback: Coronavirus Hits China Trade | China Bystander

  2. Pingback: Covid-19 Will Slow Progress on Phase One US-China Trade Deal | China Bystander

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