The Sino-U.S. Phase One Trade Deal Is an Imperfect Painkiller. What's Next?
After two days of intense talks with United States Trade Representative (USTR) Robert Lighthizer, Chinese Vice Premier Liu He and his delegation crossed the street to the White House on the afternoon of October 11th to meet with President Donald Trump for the first time since the negotiations collapsed in May. The visit marked the 13th round of the bilateral trade talks and concluded with an announcement from the Oval Office of a “phase one” agreement. According to President Trump, this included China’s commitment to purchase $40-50 billion of U.S. agricultural products and a pledge to strengthen its intellectual property protection regime domestically. Moreover, Beijing would make still-unknown adjustments to how it manages its currency, the renminbi. For its part, the United States delayed a scheduled tariff hike on $250 billion of Chinese goods from 25% to 30% on October 15th. In addition, the Treasury Department would potentially review its previous decision to designate China a currency manipulator.
All in all, it seemed to mark a turning point in the bilateral tensions. According to a tweet from President Trump two days later, this was the beginning of a larger deal that would be spread over three phases and that would benefit American farmers and potentially put an end to the trade hostilities between the two nations. In short, he tweeted, “the relationship with China is very good.” Though he acknowledged that the actual terms of any deal are still being worked out, the President repeatedly expressed optimism that he and Chinese leader Xi Jinping could ink a deal by mid-November during their meeting at the upcoming Asia-Pacific Economic Cooperation (APEC) meeting in Santiago, Chile.
Unfortunately, such confidence is misplaced. The decided lack of details on the scope, timing and mechanics of the phase one announcement is an indication of just how preliminary the agreement is. Second, Beijing remains unwilling to make more substantive concessions on core structural issues, ranging from its preferential treatment of its state-owned enterprises to a credible commitment that it will protect the intellectual property of foreign companies. Finally, even if phase one comes to fruition, this won’t do much to reduce the uncertainty that likely will define the U.S.-China relationship for years to come, as both countries begin to openly acknowledge that they are entering a period of prolonged strategic rivalry.
The decided lack of details on the scope, timing and mechanics of the phase one announcement is an indication of just how preliminary the agreement is.
In contrast to the over-optimism of the U.S. side, China registered a more cautious note. Upon the conclusion of the negotiations, Xinhua, the Chinese state news agency, issued a short readout that described the negotiations as candid, effective and constructive. Notably, it did not mention any specific commitments by Beijing but instead framed the two sides as making good progress and agreeing to move towards an ultimate resolution. China’s Foreign Ministry spokesperson merely confirmed that the U.S. description “is the same with our understanding on this agreement.” However, to date, China has neither confirmed nor denied the particular details of phase one, including offering information on which agricultural products it would buy from the United States and how it plans to adjust its intellectual property and currency regimes.
Of course, there is a strong economic argument for China wanting to come to a deal. Its economy is growing at 6%, an impressive rate for a developed economy; but for China, this is the slowest growth rate in more than 30 years. Beijing is also navigating its worst food safety scandal in decades, with the price of pork—a major component of the Chinese diet—nearly doubling across the country over 2018 levels. Pork imports from the United States might help alleviate some of the pressure coming from disgruntled Chinese citizens if Beijing decides to drop its prohibitive tariffs.
Yet Beijing has been consistent that for talks to make substantial progress, the United States must drop all existing punitive tariffs on Chinese products. Dismantling them has been a key demand throughout the past 15 months of negotiations, with China seeing their removal as a clear indication that the Trump administration is serious about finding an off ramp. While the recently concluded talks ended with the suspension of the October tariff hike by the United States, the December tariff rate increase was left untouched.
This creates a dilemma for China, for many of its retaliatory tariffs on U.S. goods have targeted the agricultural sector. To increase agricultural purchases from the United States in order to satisfy the phase one agreement would mean China would drop its existing leverage without having forced the United States to make a similar concession.
And there remains no sign that Beijing is willing to address any of the larger structural issues that the Trump Administration has raised as being highly problematic. In fact, none of the recent negotiations included a record of the two sides discussing the Chinese government’s involvement in its economy, including the direct and indirect support for the state sector and the market-distorting subsidies to domestic industries. These issues are widely seen as the most intractable to negotiate, and from Beijing’s perspective, they are completely off the table. Since he rose to power in 2012, Chinese leader Xi Jinping doubled down on efforts to ensure that the Communist Party of China is deeply involved in regulating and planning the Chinese economy, including through strong investments to control the “commanding heights.” Xi is not looking to introduce a radical degree of liberalization into the Chinese economy, nor is he looking to make a U-turn on his own economic governance model, putting him in stark opposition to many of the key U.S. demands.
There remains no sign that Beijing is willing to address any of the larger structural issues that the Trump Administration has raised as being highly problematic.
Finally, even if these core trade and economic tensions could be solved (a big if), there are numerous—and proliferating—flash points between the two countries, not least of which are the ongoing unrest in Hong Kong and the addition of the Chinese company Huawei to the U.S. Entity List. As many are coming to recognize, mounting national security concerns over China’s economic, military and technological rise are driving a more robust—if uncoordinated—agenda to “decouple” the U.S. and Chinese economies. It is these bilateral tensions that will define the bilateral relationship for decades to come, not the current trade contretemps.
Jude Blanchette holds the Freeman Chair in China Studies at the Center for Strategic and International Studies (CSIS) and is a public intellectual fellow at the National Committee on United States-China Relations. Qiu Mingda is a Research Associate at the Freeman Chair China Studies at CSIS.
Freeman Chair and Research Assistant in China Studies at the Center for Strategic and International Studies