5 Takeaways From Trump’s New China Trade Pact

The agreement may help him get reelected, but it’s only a truce, not a free trade deal.

Chinese Vice Premier Liu He and U.S. President Donald Trump display the signed “phase one” trade agreement at the White House on Jan. 15.
Chinese Vice Premier Liu He and U.S. President Donald Trump display the signed “phase one” trade agreement at the White House on Jan. 15. Saul Loeb/AFP/Getty Images

The much-touted “phase one” trade agreement between the United States and China was finally unveiled Wednesday and, contrary to U.S. President Donald Trump’s claims that it is “[o]ne of the greatest trade deals ever made,” remains as underwhelming as when the outline was made public last month.

Essentially a cease-fire agreement in what had threatened to escalate into an all-out trade war between the world’s two biggest economies, the new agreement is a big purchase order for U.S. goods, topped with plenty of rehashed Chinese promises of reforms in areas like intellectual property protection, and leavened with a novel enforcement mechanism that has never been tried before in a trade deal. With U.S. farmers hurting badly from the trade war in an election year, the deal promising tens of billions of dollars more in purchases of soybeans and other agricultural products appears at least partly designed to boost Trump at the polls in November.

Here are five takeaways from the just released text of the new U.S.-China agreement.

1. It’s a truce, not a free trade deal.

While markets were happy that the deal foreclosed an even bigger escalation of trade tensions in December, including another tranche of U.S. tariffs, the bulk of U.S. duties on Chinese exports to the United States will remain even after the signing of the deal. About two-thirds of Chinese goods will still face import taxes that are six times higher than when Trump took office—and most of those are the kinds of intermediate goods that U.S. manufacturers use to make their own products. U.S. businesses and consumers have already forked over more than $40 billion to pay for Trump’s import taxes.

China, too, will apparently keep its own tariffs on U.S. exports, including on energy products like natural gas and crude oil. So the deal, whatever it does, doesn’t move the United States much further away from the protectionism it has embraced since Trump took office.

While the Trump administration talks about an eventual “phase two” deal with China that could actually tackle structural issues that bedevil the two economies, few trade experts expect much progress, if any, on such an agreement—especially during an election year. And politics could themselves make the new agreement more fragile than it seems: With Trump’s hawkish stance on China a popular one, he may be under pressure this year to go back to his preferred path of confrontation and tariffs to score political, rather than economic, points.

2. It doesn’t address the core issues that started the trade war.

The United States began its tariff fight with China on the grounds of a so-called Section 301 investigation, which highlighted Beijing’s abuse of its state-led economic model, including via state-owned companies, industrial subsidies, and state-directed cyber-espionage. Other than some fresh Chinese promises to crack down on intellectual property theft (more below), the deal just signed doesn’t address any of those core concerns that supposedly motivated the Trump administration in the first place.

“This does not in any sense address the big, systemic issues that China and the United States have with one another on trade,” said Chad Bown of the Peterson Institute for International Economics.

That’s particularly true when it comes to China’s alleged currency manipulation for competitive advantage, for years a bogeyman of Trump and his officials, even when China was doing the exact opposite. In the new agreement, China reaffirmed commitments it had already made, such as in various G-20 meetings, to avoid manipulating the renminbi for competitive advantage and signed up for the bare minimum in foreign reserve disclosures. (On Monday, just two days before the signing ceremony, the U.S. Treasury Department abruptly removed China from the list of currency manipulators, just months after adding China to the list during the darkest days of the trade spat.)

“The foreign exchange provisions were the most disappointing” aspect of the deal, said Brad Setser of the Council on Foreign Relations. “Of all the various things expected in the deal, they were really underwhelming. The absence of any genuine, new commitments on the part of China, simply repackaging existing commitments—that was undoubtedly disappointing.”

When the trade fight began, the Trump administration set out to make China a more market-friendly economy. Instead, the United States has embraced state-managed trade, where Beijing commits to using state-owned firms to purchase guaranteed amounts of U.S. farm goods, oil, gas, and manufactured products.

“Given that attempts to create new opportunities for U.S. exporters by changing rules and policies haven’t been overwhelmingly successful in recent years, I can see why the administration might feel that setting out targets and asking a state-dominated economy to meet those targets is a way to do it,” Setser said.

3. It’s all about shrinking the U.S. trade deficit.

That kind of managed trade is the centerpiece of the new agreement: a Chinese commitment to purchase, over a two-year period, $200 billion worth of U.S. goods above and beyond what it bought in 2017, before the trade war began in earnest. Big purchases like that have been the focus of the Trump administration’s approach since the beginning, because, while the trade professionals launched a formal investigation into China’s abusive macroeconomic practices, Trump cares mainly about the U.S. trade deficit with China, which totaled $379 billion in goods and services in 2018.

The new agreement calls for China to buy an additional $33 billion in manufacturing goods this year and $45 billion next year; an additional $12.5 billion in farm products this year and $19.5 billion next year; $18.5 billion more in natural gas and crude oil this year and $34 billion more next year; and finally, $13 billion more in services this year and $25 billion next year.

If all those planned purchases materialize—and there are considerable doubts they will—it could represent a boon for U.S. farmers and manufacturers (assuming they don’t just suck away exports from other markets). But there are a few problems. First, China still has most of its tariffs on U.S. exports, including on many of the goods on that list; since China insists that it wants commercial considerations to determine its purchases, that could be a problem for U.S. exporters.

Second, those numbers are hugely ambitious. The biggest-ever year for agricultural sales to China came in at $29 billion, for instance; the new agreement would require China to buy $40 billion or more worth of farm goods in 2021, roughly double what it bought in 2017. Similar stretches would be required to meet the export goals in energy and manufacturing—and if the Trump administration believes China isn’t meeting its commitments, it can blow up the deal.

Third, such managed trade might be illegal under World Trade Organization (WTO) rules, which prohibit discrimination. Other suppliers of agricultural goods to China, such as Brazil and Argentina (which have taken advantage of the last two years of turmoil to flood the Chinese market), are unlikely to stand idly by if China’s new purchases simply come out of their pocket. If their own exports suffer, they could bring a complaint against China at the WTO for discriminatory practices.

Of course, since the Trump administration single-handedly dismantled the WTO’s dispute settlement system last month, such complaints may amount to pounding sand—countries around the world now have no way to ultimately adjudicate their trade disputes thanks to the administration’s disdain for multilateralism.

4. The agreement’s enforcement mechanism is untried—and risky.

For the Trump administration, it’s just as well that the WTO is moribund, because the enforcement provisions in the new agreement are entirely bilateral. Any disputes over compliance with the terms of the agreement will be dealt with in bilateral consultations at a staff level by trade experts. If they can’t resolve it, it can get kicked up to the level of the U.S. trade representative and China’s vice premier. If they still can’t solve it, the aggrieved party can retaliate as it sees fit—and the other side can’t do anything about it. If the other side doesn’t like the retaliation, they have one option, according to the deal’s text: “[T]he remedy is to withdraw from this Agreement.”

“The way it seems enforcement will work is very different than in any other trade agreement ever,” Bown said. “There are a lot of open questions on how this is going to work in practice.”

5. There are some small victories tucked into the agreement.

While the “phase one” deal is hardly the game-changer that Trump or administration officials tout, there are some positives tucked into the 96 pages. For instance, China reiterated promises it has made in the past to take a tougher line on protecting intellectual property rights. And China, which denies ever having forced foreign companies to hand over their technology as the price of doing business there, agreed not to do what it says it didn’t do anyway. (At least the central government did—but since a lot of U.S. complaints focus on what local and regional officials and firms do, it’s not clear the agreement will entirely solve that problem, either.)

The United States and China seem to have torn down a number of non-tariff barriers to U.S. agricultural trade, such as limits on U.S. poultry or beef exports. Those Chinese commitments to open up greater access for certain farm and fish products, coupled with pledges to buy more agricultural goods overall, could over time start to undo some of the damage wrought by the trade war over the last two years.

And the United States did claw greater access for financial services in the huge Chinese market, opening the door for U.S. banks, insurance companies, rating agencies, and electronic payment systems like Visa and Mastercard to fully enter a market that has long been denied them.

Keith Johnson is a senior staff writer at Foreign Policy. Twitter: @KFJ_FP

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