Trump gets his Deal

Donald Trump signed the Phase One US-China trade deal with China’s Vice-Premier Liu He in Washington D.C. on Wednesday.

The deal is important for Trump politically as he needs to disrupt media focus on his impeachment playing out in the Senate.

China attempted to downplay the significance of the deal by sending their Vice-Premier rather than Xi Jinping for the signing ceremony. But the deal is no less important for them in order to halt/slow the relocation of manufacturing jobs by multinationals to avoid US tariffs.

Trivium China sum up the outcome:

  1. We are still in a trade war. Tariffs remain levied on hundreds of billions of USD worth of goods.
  2. A phase two deal looks dead in the water. US President Trump has already said that he might wait until after the November election to negotiate the next phase. More importantly, there is little appetite in China to make concessions on any of the remaining issues.
  3. Third countries are getting screwed. China’s overall import bill is unlikely to jump by USD 200 billion over the next two years, so increased purchases of US goods will come at the expense of producers in other countries.
  4. This deals another blow to the multilateral trading system. The world’s two largest economies just bypassed the multilateral rules-based system to negotiate a deal that undermines the principles of free trade.
  5. China is downplaying the deal. The fact that Liu He – not Xi Jinping – signed the deal sent a strong signal domestically that this is not a big deal. And Chinese officials have said that most of these measures would have happened irrespective of a deal.
  6. Finally, the deal is a positive for stability. This will serve to halt – or at least slow – economic decoupling. That’s a positive for the global economy and security.

Rhodium Group in The Good, The Bad and The Missing focus on what should have been in the deal but isn’t:

  1. Chapter 1 Pledges greater protection for a handful of specific products – pharmaceuticals, medicines and unlicensed software – and generally more enforcement against counterfeit products but the concerns of other industries are not addressed
  2. There are no robust enforcement mechanisms in Chapter 7. It provides a forum for discussion and consultation but not arbitration. If unable to resolve the issue, the aggrieved party can withdraw from the Agreement. This creates little incentive to resolve issues and may result in a logjam.
  3. The managed trade approach does not even start to remedy systemic concerns like the predominance of state enterprises, the prevalence of foreign investment limitations in the vast set of industries that did not get early attention in this deal, the lack of consistency in competition policy treatment and the general asymmetry of information and the playing field for private firms foreign and domestic.
  4. Phase One fails to address growing challenges at the intersection of economics and national security: Huawei and 5G telecommunications, detentions and pressure on expatriates and travelers from the other side, foreign investment screening and export controls, and the threat of financial decoupling.

Rhodium concludes:

The agreement is a limited one, primarily capping the potential for further escalation of protectionism on both sides rather than taking serious steps to address long-standing issues in Chinese trade practices. The managed trade outcomes in which China promises additional US imports are the most significant substantive commitments made, but China’s capacity and willingness to meet these targets remains in question. Significant tariffs remain in place on both sides, uncertainty about the future path of the US-China relationship will persist, and the broader decoupling trends in security-sensitive areas of the bilateral relationship will continue. Progress toward any Phase Two agreement is likely to be minimal in 2020. (The Chinese side immediately said after the January 15 signing that it wanted to go slow before any further talks.)

The deal attempts to head off further escalation but falls well short of addressing long-standing issues with Chinese trade practices. Trade tensions and decoupling are likely to continue.