Phase one trade agreement signed in Washington
January 21, 2020 Category Foreign trade, Weekly
U.S. President Donald Trump and Chinese Vice Premier Liu He signed the 86-page phase one trade agreement at the White House in Washington on January 15. Trump characterized the agreement as “a momentous step – one that has never been taken before with China”. “This is the biggest deal anybody has ever seen.” but China was less enthusiastic. “The first phase of the agreement certainly leaves both sides with regret and unhappiness, which is exactly the response that a fair agreement will elicit. Arguing who lost and who won is superficial,” the Global Times commented.
Leading U.S. officials and about 200 representatives of business, government and diplomatic circles attended the signing ceremony, including 96-year-old former Secretary of State Henry Kissinger. Although U.S. tariffs remain on USD250 billion worth of Chinese goods, the U.S. has called off new tariffs on USD156 billion worth in Chinese goods in December and slashed by half a 15% tariff on USD120 billion worth of Chinese products. The U.S. also suggested further tariff relief if a phase two deal can be reached. It was Vice Premier Liu He’s seventh trip to the U.S. since the outbreak of the trade war. EU Trade Commissioner Phil Hogan dismissed the new deal as negative for competitiveness and jobs, underscoring the cautious reception the “phase one” pact has got from European officials and businesses. “The devil is in the detail,” Hogan told a conference in London, adding that so far, the details were “a bit sketchy”.
The average U.S. tariff on Chinese products will be 19% after the deal is implemented, compared to 3% before the trade war, research by the Peterson Institute for International Economics showed. An enforcement mechanism means the U.S. can unilaterally resurrect the tariffs should it deem that China has not upheld its side of the bargain.
The deal at least put the brakes on the 18-month trade war that has disrupted global supply chains and shaken markets. For Vice Premier Liu, the most significant value of the deal was that China and U.S. could manage their differences through dialogue, the South China Morning Post reports. The deal “has fully proved that, in spite of many differences, we can work together. This kind of cooperation is not only good for China and the U.S. but also the whole world,” he said.
The partial trade truce has also dashed talk of decoupling between the world’s two largest economies, Liu added. “I think it is very unrealistic. A few people without economic backgrounds are talking about decoupling between China and the U.S., but in reality it is impossible to take place – a global value chain has been formed with ‘part of me in you and part of you in me’,” he was quoted as saying. He said that domestically, the deal would promote fair play and curb unfair competition. “If we look back in 10 years, we may find that it had made a very positive push for the technological advancement of China,” Liu said.
China and the U.S. also differ on the next stage: phase two negotiations. U.S. President Donald Trump has announced that he would travel to Beijing in the not too distant future to launch the phase two talks, but Chinese Vice Premier Liu has told Chinese media it would be foolish to pursue a phase two trade deal with the United States when the ink on phase one is not yet dry. If China and the U.S. hurry ahead with phase two talks after only just signing a phase one deal, the two countries would be acting like “a bear losing itself in a corn field”, said Liu, referring to a Chinese proverb. “We might get nothing if we rush to a second job before the first one is properly done. I don’t think it is a wise choice to impatiently launch new stages of talks,” the Vice Premier told Chinese media in Washington after signing the partial trade agreement with Trump.
As part of the deal, China agreed to purchase at least USD200 billion in additional U.S. goods and services over two years, including USD32 billion of agricultural goods. This will require U.S. exports to China to grow 40% in 2020 and an additional 40% in 2021 – “implausibly large increases”, said David Dollar, Senior Fellow covering China at the Brookings Institution. The trade war has cost U.S. businesses USD46 billion since February 2018, Reuters has reported. In China, the phase one deal could boost GDP growth to 6% in 2020 as opposed to an earlier forecast of 5.8%, according to the IMF. The Chinese government said that increased imports from the U.S. would not reduce China’s import volume from other countries.
Ahead of the signing of the trade deal, the U.S. government decided to remove its designation of China as a currency manipulator. In its latest foreign exchange report, the U.S. Treasury Department reversed its earlier decision to label China as a currency manipulator, saying that terms in the phase one trade agreement addresses its concerns over China’s practices. In August 2019, when trade tensions between China and the U.S. were running high, the U.S. moved to brand China a currency manipulator without any concrete evidence, even by its own standards. Though the move was largely symbolic, it drew a fierce response from Chinese officials, who labeled the decision as politically motivated rather than fact-based.
Still, much work needs to be done. “Even after the phase one deal is signed, the most important part is not over. Both sides must implement the agreement,” Song Guoyou, Director of Fudan University’s Center for Economic Diplomacy in Shanghai, told the Global Times. China must be prepared for “potential changes to the deal in the implementation phase,” Song added. He pointed out that the U.S. has shown great unreliability previously and “we cannot rule out that potential new differences will emerge during the implementation process.” The two countries remain far apart on issues including China’s industrial policies and reforms of state-owned companies.
China’s Ministry of Finance and the Office of the U.S. Trade Representative (USTR) meanwhile released the full text of the phase one trade agreement. The English text (PDF) is available here.
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