China and the U.S. reach phase-one trade deal
December 17, 2019 Category Foreign trade, Weekly
China and the U.S. have made a breakthrough in trade negotiations, with an 86-page agreement reached for a phase-one deal that will halt further tariff increases and lower some already in place, Chinese Vice Minister of Commerce Wang Shouwen announced. As an immediate result, a new 15% tariff on around USD160 billion of Chinese goods, scheduled to come into effect on December 15, was canceled. China also canceled retaliatory tariffs of 5% and 10% scheduled to be implemented on the same day, also including a 25% levy on U.S. cars. A batch of 25% U.S. tariffs on USD250 billion of Chinese imports would remain and another one of 15% tariffs on USD120 billion would be halved to 7.5%. As a result of the phase-one deal, U.S. exports to China are expected to almost double over the next two years, according to U.S. Trade Representative Robert Lighthizer, who added that the deal is “totally done” despite the need for translation and revisions to the text. Lighthizer called December 13 “the most momentous day in trade history” because of the China deal and because the White House sent a revised U.S.-Mexico-Canada Agreement to Congress for approval.
The agreement covers a wide range of issues, including intellectual property protection, technology transfer, purchase of agricultural products and expanding trade. The Office of the United States Trade Representative (USTR) confirmed the agreement, saying in a statement: “The United States and China have reached a historic and enforceable agreement on a phase-one trade deal that requires structural reforms and other changes to China’s economic and trade regime in the areas of intellectual property, technology transfer, agriculture, financial services, and currency and foreign exchange.” Both countries will review the text and discuss arrangements for signing the agreement, which could take a few weeks. The deal could be signed in January by U.S. Trade Representative Robert Lighthizer and Chinese Vice Premier Liu He. U.S. President Donald Trump said phase-two talks would start soon. The text of the phase one deal includes nine chapters: the preface, intellectual property rights, technology transfer, food and agricultural products, financial services, exchange rate and transparency, trade expansion, bilateral assessment and dispute settlement, and the final terms. More detailed terms and data will be released later. Vice Minister of Agriculture Han Jun said China would buy more U.S. pork and poultry, which are urgently needed. China’s purchase of U.S. agricultural products recorded a year-on-year drop of 32.7% in 2018. China imported USD10.4 billion of agricultural products from the U.S. from January to October, dropping by 30.8% from the same period last year because of the tariffs.
The U.S. will implement its promise to eliminate tariffs on Chinese goods “phase by phase”, and U.S. tariffs will start to go down instead of up. The elimination of tariffs on Chinese products is the “core concern” of China and Beijing hopes the U.S. can keep its word, said Liao Min, Vice Minister of Finance. “The next round of tariffs would have been an unmistakable ‘own goal’, hurting American companies and consumers more than China,” said Douglas H. Paal, Distinguished Fellow of the Asia Program at the Carnegie Endowment for International Peace. “Even Trump saw its downsides, so it makes every sense to avoid the new round,” which would have gone into force on December 15, Paal told China Daily. Gary Hufbauer, Senior Fellow at the Peterson Institute for International Economics, said it will be a “big relief” not to have a new round of tariffs. A deal “will be good news for Christmas shopping and for business confidence”, he said.
But the phase-one agreement may offer only initial relief as both countries’ governments face uncertainties at home, observers said, cautioning that some of the remaining points of dispute were likely to resurface in subsequent talks, along with the unpredictability of U.S. President Donald Trump. Wang Yong, Professor of International Relations at Peking University, said an interim trade deal could ease tensions but China should be prepared for Trump’s changeability. “For Beijing, what is important is to have time to adjust and to cement the confidence of foreign investors in China,” Wang said. There is no sign of progress in the more thorny part of the negotiations, such as Chinese government subsidies. “A phase-one deal can’t solve the fundamental differences between China and the U.S.,” said former Minister of Commerce Chen Deming, adding that Washington now views China as a strategic competitor. “But at the moment when both economies are facing difficulties, a deal can at least offer some light, a bit of good news, a bit of comfort, but it can’t solve all problems,” Chen added in an exclusive interview with the South China Morning Post.
Scott Kennedy at the Center for Strategic and International Studies (CSIS) wrote that “aside from a cessation of continued escalation, there is not much worth cheering.” The text has not been finally approved, as it still needed to be translated into Chinese. Kennedy said that “it would be fair to call this arrangement “fragile”. It is not hard at all to see how it could collapse as a result of untoward actions by either side.” But Mary Lovely of the Peterson Institute for International Economics said that “a cease-fire is very significant,” especially the cancellation of the planned December tariffs. “We were on the brink, and trade negotiators pulled us back.”
Reports that China could be poised to buy USD50 billion worth of farm goods next year is doubted by analysts, because it is likely more than the Chinese market has demand for, and it is not clear U.S. farmers could even produce that much. The record level of U.S. agricultural exports to China was less than USD30 billion. “It won’t solve any of the problems in the U.S.-China economic relationship – agriculture and crude oil sales are not the problem,” said Derek Scissors, China Expert at the American Enterprise Institute, according to the website Foreign Policy. President Trump “promised manufacturing jobs and is not getting any of that in the trade deal,” Scissors added. The U.S. trade deficit with China – Trump’s big concern – has only grown on his watch. It’s not clear yet whether the mini deal will exacerbate that deficit, or maybe start to trim it. But what has come out so far “does not fulfill at all the President’s campaign promises,” Scissors said.
Numerous groups representing a huge swathe of the American economy – including the U.S. Chamber of Commerce, National Retail Federation, Semiconductor Industry Association, American Petroleum Institute and the Consumer Technology Association – welcomed the deal and the de-escalation in U.S.-China tensions it represented. But they also expressed hope there would be no backsliding and that the announcement would be a springboard to a more comprehensive phase-two trade agreement.
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