President Donald Trump is expected to sign “phase one” of a U.S.-China trade deal Wednesday—marking a cooling of the trade war that has roiled markets and upset supply chains around the globe.
On paper, the deal will enhance Intellectual Property (IP) protection, tackle forced technology transfer and boost market access to key sectors of the Chinese economy, such as financial services and agriculture. An enforcement provision will allow the U.S. to unilaterally reimpose tariffs if the Americans think China has welched on its commitments.
In exchange, the Trump Administration will drop or reduce many of the tariffs imposed on Chinese goods imported to the United States.
However, trickier aspects of the U.S-China trade dispute—like subsidies for China’s state-owned enterprises—haven’t been included in “phase one.” And they may never never get tackled at all—so unyielding is each side’s position.
This makes it all too likely that the two countries will return to trade tensions and new tariffs, experts say.
“I expect this agreement will be fairly temporary,” says James H. Nolt, a senior fellow specializing on Asia at the World Policy Institute in New York. “They’ve kind of papered over some disagreements and made promises that can’t be kept.”
What’s in the “phase one” trade deal?
Like most trade deals, “phase one” has a little something for both sides to tout.
China is promising to buy $200 billion of American goods over the next two years: $50 billion worth of energy, $40 billion in agriculture, $35-40 billion in services and $75 billion of manufactured products, sources on both sides told the South China Morning Post.
Washington has already scrapped extra tariffs that were due to come into force on Dec. 15, and cut in half a 15% levy on $120 billion worth of Chinese goods. Still, 25% tariffs on $250 billion worth of Chinese goods remain in place. On Monday night, the U.S. also removed China from a list of currency manipulators in preparation for the deal.
The enforcement provision is viewed as especially important for Washington, since China has reneged or slow-walked similar structural promises have many times in the past, including after it joined the World Trade organization in 2001 with a commitment to open its economy along a five-year timetable.
However, Xu Bin, professor of economics and finance at the China Europe International Business School in Shanghai, believes Beijing intends to keep to its side of its bargain with Trump—mainly because the reforms in the trade deal are not the most painful on the table and, in the long term, will actually benefit China.
“I think China will keep to [the agreement], but China will do so to the extent that it is benefiting itself,” says Xu. “If we look at the relative needs of these two countries, economically speaking, I think China needs the U.S. market more.”
Certain provisions are also likely to benefit both sides. For instance, protections for intellectual property were long a priority for U.S. business leaders, but China is no longer a technology laggard and may actually be helped by strengthening IP protections as its firms begin to dominate strategic industries, such as 5G and artificial intelligence.
Likewise for new market access to U.S. financial services firms. Even if some domestic companies lose out in the short term, economists have long argued that China as a whole would benefit from Western companies being allowed to offer banking, insurance and other financial services (even if credit cards are largely obsolete due to advanced mobile payment apps).
What’s more, $40 billion of agriculture imports over two years is actually less than the $24 billion China purchased annually before the trade conflict began.
What do Trump and Xi get out of the deal?
In the end, it might not matter much for Trump, who has already been touting the deal in his re-election campaign. Some 200 guests have reportedly been invited for the signing ceremony in the East Room of the White House, where Trump is scheduled to sign the document alongside Chinese Vice-Premier Liu He, who has led Beijing’s negotiating team.
Chinese President Xi Jinping may not have election rallies to worry about, but he is not immune to political pressure. Between growth at a three-decade low, international censure at the U.N. over human-rights abuses in restive Xinjiang province, popular revolt in Hong Kong, and Taiwan’s voters unequivocally rejecting his pitch for reunification in elections last weekend, Xi would clearly appreciate clearing one festering crisis from his in-tray.
Criticism of his handling of the dispute has continued to rumble amongst China’s academic and elite circles, even if the state censorship apparatus has kept it largely scrubbed from press and social media. Key for Xi is is ensuring the nation’s economy is as healthy as possible. Despite improved monthly trade figures released Tuesday, “the full-year trade story is pretty bad,” Nick Marro, lead for global trade at The Economist Intelligence Unit writes in a briefing note.
“The Chinese don’t want the bad news of an ongoing trade war to hang over public opinion and investor confidence,” says Nolt.
But, this won’t be the end of trade wars
Few believe we have seen the end of tariffs wielded as a political cudgel. While Trump has used import taxes or their threat against countries from India and South Korea to Canada and Mexico, he has not been alone in rebooting their use worldwide. Japan and South Korea also recently become embroiled in their own trade wrangle over historical abuses during Tokyo’s colonial rule of the Korean peninsula.
According to Nolt, the problem stems from global business coalescing behind a few private monopolies—think Google, Facebook, Amazon and even large pharmaceutical firms—that generate huge profits but do little to boost wages or create jobs, owing to the fact they are mainly about leveraging the IP of the services they provide, rather than the manufacture and trade of goods.
“Part of it is that the business system itself has changed and the trading system hasn’t adapted to take it into account,” says Nolt. “The popular benefits of the old trading system are gone.”
But instead of targeting the systemic causes of these problems, populists have often picked easier targets whether it is immigrants “stealing jobs,” or Chinese factories taking orders away from American ones. “So you will see more trade protectionism used as a tool by politicians,” says Xu.
And so while a truce in the trade war suits both sides at the moment, it won’t be long before that political calculation changes. The U.S. is still demanding that China reforms its state-dominated economy despite many of the subsidies Beijing provides firms also offered by the U.S. Amazon, for example, was offered $3 billion in tax breaks and other incentives to relocate to New York City before the deal collapsed.
It’s not just domestic U.S. firms: In 2017, Foxconn received $4 billion in state and local tax incentives to build a manufacturing plant in Wisconsin that would employ 13,000 people, which Trump hailed as “one of the great deals ever.” Aside from the fact that the cost to the taxpayer amounted to $346,000 per job, and the factory remains mothballed, Foxconn is a Taiwanese firm with 90% of employees in mainland China.
Surely, if Trump is demanding that China stops offering state subsidies, Beijing might think it deserves reciprocity, and that the U.S. should agree to stop offering billions in tax breaks to American firms, as well as using such incentives to lure away established Chinese investors like Foxconn. Until recently, Foxconn was China’s single largest private employer, with over a million staff.
“China is especially sensitive given its history of being forced into unequal treaties with Western powers [in the 19th and early 20th centuries],” says Nolt.
Of course, Trump has in fact boosted subsidies for American farmers to the tune of $28 billion (more than twice the $12 billion Obama controversially used to bail out the U.S. auto industry.)
And there remain other unequal aspects of the trade relationship, like the need for American firms to partner with a Chinese firm in the auto industry, which is a prime source of forced technology transfer. But that is already changing: U.S. automaker Tesla just built its new Shanghai factory without partnering with a Chinese firm, for example. (Telsa also receives Chinese tax breaks including a government subsidy of $3,560 per vehicle produced.)
And so with negotiations on the subject destined to fail, it probably won’t be long until Trump reaches for tariffs once again.
As populism takes root across the globe, other nations, too, are likely to take similar measures.
“This is something that all countries need to face up to,” says Xu, the professor in Shanghai. “How to alleviate the pain and disadvantage of those people who suffer from not only globalization but also the more technological developed world.”
