Initial China trade deal defuses tensions, but US still has concerns

The United States has now collected more than $39 billion from the tariffs placed on $360 billion worth of Chinese goods

US, China, trade war
FILE PHOTO: US President Donald Trump and China's President Xi Jinping shake hands | Reuters photo
Alan Rappeport, Ana Swanson, Keith Bradsher & Chris Buckley | NYT Washington
8 min read Last Updated : Dec 15 2019 | 12:21 AM IST
When President Trump and China confirmed on Friday that they had reached an initial trade deal, it helped defuse tensions in a 19-month trade war and avoided another round of punishing tariffs scheduled for this weekend.

But a trade deal that took nearly two years to reach and inflicted global economic damage in the process does little to resolve the United States’ biggest concerns about China’s trade practices, including its use of industrial subsidies and state-owned enterprises to dominate global industries like steel and solar panels.

If signed, the deal would increase Chinese purchases of American farm and energy products, place limits on Beijing’s ability to weaken its currency and provide greater protections to American companies operating in China. It would also reduce some of Trump’s tariffs and forestall new tariffs slated for Sunday.

Yet its main benefit may be to help Trump politically — allowing him to promote large gains to American farmers devastated by the trade war, calming anxious investors and convincing voters before the 2020 election that he has lived up to his promise to get tough on China.

“It’s a phenomenal deal,” Trump said on Friday at the White House. “The China deal covers tremendous manufacturing, farming, a lot of rules, regulations, a lot of things it covers. It’s a Phase 1 deal, but a lot of big things are covered. And I say affectionately: The farmers are going to have to go out and buy much larger tractors, because it means a lot of business, a tremendous amount of business.”

Trump, who campaigned on rewriting the rules of global trade in America’s favour, has spent the past two years upending diplomatic processes that have long governed trade policy. He has pressured trading partners by threatening to scrap existing deals and imposing more tariffs than any other president in modern history. The United States now has the highest tariff rate of any advanced nation, higher than even China, India and Turkey.

Whether that approach has achieved Trump’s goal of putting “America First” is an open question. While many credit his tough tactics with bringing trading partners to the table, others say it has failed to produce bigger gains than those achieved through traditional trade negotiations, and destabilised the global economy in the process.

“Pardon me if I don’t pop champagne, but aside from a cessation of continued escalation, there is not much worth cheering,” said Scott Kennedy, a China expert at the Center for Strategic and International Studies. “There is still significant ambiguity about what is in the deal, but based on what we can surmise, it is unclear if the struggles of the past two and a half years have been worth it. The costs have been substantial and far-reaching, the benefits narrow and ephemeral.”

The China deal was Trump’s second trade victory of the week, after Democrats agreed to support a revised North American Free Trade Agreement, moving it closer to becoming law. Businesses welcomed the update of the 25-year trade pact, and tech companies in particular have praised the agreement’s strong protections for technology.

The pact broke ground politically, gaining the support of Democratic lawmakers and unions that have long derided existing trade agreements and perhaps forging a new bipartisan consensus on trade. But as with the China deal, the United-States-Mexico-Canada Agreement is more a modest improvement than a transformative overhaul to the economy.

In a note to clients, Gregory Daco, an economist at Oxford Economics, called the net economic benefits of USMCA “negligible”, but praised the deal for preventing a potential hit to the economy. The president had threatened to withdraw from NAFTA entirely if his trade pact was not advanced.

“The principal commercial benefit of both agreements appears to be the avoidance of what would have been self-inflicted harm — tariff escalation with China and termination of NAFTA,” said Michael J Smart, a managing director at Rock Creek Global Advisors, an advisory firm.

The China deal also averts what would have been an economically damaging escalation of the trade war before the holiday season and the 2020 campaign. Mr. Trump had planned to slap 15 per cent tariffs on shoes, laptops, toys and other goods on Sunday — a move that would have resulted in the US taxing nearly every Chinese import and most likely inciting more retaliation from Beijing.

The United States has now collected more than $39 billion from the tariffs placed on $360 billion worth of Chinese goods, which Trump says China pays but economists say falls heavily on American businesses and consumers.

Robert Lighthizer, Trump’s top trade negotiator and one of the administration’s biggest China hawks, said in a briefing that China had made substantial commitments to increase purchases of American agriculture, energy, manufacturing and services products.

China’s farm purchases are expected to grow to at least $40 billion annually over a period of two years, while total exports of food, energy, manufactured goods and services to China will increase by a total of $200 billion, he said. The deal would increase protections for American intellectual property and end China’s practice of forcing American companies to transfer technology to Chinese partners. It would also open Chinese markets for financial services and American exports of beef, poultry, seafood, infant formula and pet food. Tariffs could go back in place if China fails to live up to its commitments, he said.

Lighthizer said he expected the deal to be signed in Washington during the first week of January and take effect 30 days later. He acknowledged that future phases of negotiations, which would entail some of the bigger structural changes the United States has been seeking from China, could still prove challenging to accomplish. During the negotiations, the United States repeatedly pressed China to make more transformative changes to its economy, only to be rebuffed and have the talks nearly collapse.

“There are still a lot of outstanding issues that you’re all aware of between the United States and China, which are very serious issues,” Lighthizer said. “Our sense is that we’re better off doing this in phases than to sit and make no progress at all.”

“I’m not Pollyanna,” he added. “This is going to be a very long term issue.”

Wang Shouwen, China’s vice commerce minister, said at a news conference in Beijing that the two sides had made “significant progress” and that the United States would remove tariffs “phase by phase”, suggesting that the countries had agreed to roll back more tariffs in the future when additional agreements are reached. Wang said that both sides had agreed to complete legal reviews as quickly as possible and that an official signing was still being worked out.

The Chinese government did not echo American assertions that it would buy $50 billion of farm goods a year, saying only that purchases would increase by a “considerable margin” to meet China’s needs for goods like soybean and pork.

The trade war has taken a major toll on America’s farmers, who have seen Chinese sales of soybeans, pork and other products dry up, and Trump has consistently promised that Beijing will commit to buying $50 billion worth of farm goods as part of a trade pact. China has resumed buying some American products, in part because an epidemic is ravaging the country’s hogs, sending pork prices soaring.

“I think they’ll hit $50 billion,” he said on Friday. “They’ve already stepped it up.”

Evan S Medeiros, a Georgetown University professor who was senior Asia director at the National Security Council under President Barack Obama, said the only thing of substance that had been negotiated — agricultural purchases for tariff relief — was shallow compared with Trump’s earlier, much grander promises.

The other elements thrown into an announcement — currency, enforcement of intellectual property rights and greater access by American companies to China’s financial services sector — were changes that Beijing had decided to push through regardless and had been working on already. Their inclusion was “window dressing”, he said.

“The real issues we want addressed are structural barriers”, none of which are mentioned in the deal, he said.

Investors greeted Friday’s announcement somewhat skeptically. The S&P 500 barely budged and yields on government bonds fell, suggesting slightly more pessimism on the outlook for growth and inflation. Prices of key agricultural commodities such as hogs and soybeans rose. Hog futures rose more than one per cent. Soybeans jumped on news of the trade deal but later pared their gains, settling about one per cent higher on the day.

Stephen Moore, the Heritage Foundation economist who advised Trump’s 2016 campaign, said that the agreement should be helpful for Trump’s re-election prospects because the onslaught of more tariffs next year would have been a drag on the economy.

“It’s not a huge victory for Trump in the sense of the content of the deal,” said Moore, whom the president considered this year for a seat on the Federal Reserve board. “If this is real, and the Chinese don’t pull back again, it sets Trump up nicely for 2020. The best thing about this is, if it happens, that it prevents a trade war escalation.”
©TheNewYorkTimes2019

Topics :Trade warUS-China trade deal

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