What Happened
With a signing ceremony Jan. 15 at the White House, the United States and China have made official a narrowly focused trade deal that aims to ease U.S. concerns over trade imbalances and reduce tariffs on both sides, all in an effort to limit the economic damage their trade war has inflicted not only on each of their economies, but the global economy as well. However, the so-called phase one deal leaves contentious structural economic issues and the countries' much larger differences over trade unaddressed.
The deal includes a Chinese commitment to protect intellectual property rights, open up financially and buy an additional $200 billion worth of U.S. goods from four U.S. sectors over two years — on top of the baseline purchases it made in 2017. Specifically, China pledged to import an extra $80 billion in manufactured goods, $50 billion in natural gas and oil and $32 billion in agricultural goods, in addition to $38 billion in services from the United States. In return, Washington will halve the 15 percent tariff rates it added to $120 billion worth of Chinese goods in September 2019. In addition, the U.S. Treasury Department removed China on Jan. 13 from the list of countries it considers currency manipulators. However, a significant number of existing tariffs on another $360 billion of Chinese goods will remain in place — likely until after November elections in the United States — as an enforcement mechanism. This will allow the White House to reimpose tariffs if China doesn't live up to its commitments.
Why It Matters
The 96-page agreement marks a pause in a trade war that has rattled global markets and businesses for nearly two years. The deal will help reduce the costs that U.S consumers and businesses have shouldered — and limit damage to the Chinese economy, which has experienced an extended slowdown that has increased unemployment risks. It also gives U.S. President Donald Trump a chance to trumpet a successful trade strategy during his reelection campaign in spite of criticism that the deal contains nothing that addresses structural issues in the Chinese economy. But with the initial trade deal wrapped up, the White House can now turn to the negotiation of the next phase and other trade matters, such as a push to negotiate a trade deal with the European Union. Already, the Trump administration has turned to pressure tactics against Europe, threatening to impose tariffs on European automobiles if Brussels does not cooperate with Washington's campaign to counter Tehran.
Strategic Implications
Left unanswered — by design — are significant questions over how China will fulfill its purchase commitments without significantly affecting its existing trade partners or the direction of trade flows. Full compliance with the deal would require Beijing to increase its U.S. agricultural imports by more than two-thirds over the 2017 baseline. Given Trump's focus on boosting U.S. soybean purchases, fulfilling that demand would likely compromise exports of the commodity by Brazil and Argentina — which rely heavily on Chinese demand. It will also require the United States to sacrifice its relationships with other soy importers.
Beijing, meanwhile, will need to make significant purchases of U.S. crude and liquefied natural gas to meet the goals set in the deal, which average out to $25 billion per year. In 2017, after all, it imported just $8 billion worth of those products from the United States. Despite China's increased appetite for LNG, delivering on these purchases would likely require China to reduce its demand from suppliers in the Middle East, Australia and, possibly, Russia. Reports have also surfaced that China may reroute some trade which currently passes through Hong Kong and which has not previously appeared in the U.S.-China trade balance. That, ultimately, is an action that is likely to increase the city's already considerable economic pain. Even if China manages to fulfill its pledges, the differences between Washington and Beijing in interpreting and implementing what's spelled out in the agreement will add to the fragility of the deal.
The deal creates a mechanism to resolve disputes through an appeals process and even gives the White House leeway to overlook compliance issues if that would prevent the deal from collapsing or force it to once again escalate tariffs before this year's presidential elections. Perceptions that the deal is unfavorable to China could prompt Beijing to keep the details shrouded to avoid possible domestic criticism over its trade strategy. U.S. officials suggested they are looking into the next phase of the trade negotiations to tackle more thorny structural issues, such as China's industrial policies and subsidies. Trump, in fact, hinted that Washington could lift all tariffs if the countries reach a phase two agreement, but the Chinese news media has downplayed that idea. If anything, the Chinese government has increased its support of strategic domestic sectors, likely making the prospects of a more expansive deal remote.
