The last 18 months of trade stasis between US-China concluded with an 86-page agreement— ‘phase one’ trade deal covering agreements on intellectual property, currency and China’s commitment to buy $200bn US goods for the next two years. In lieu of the US rolling back 15% duties on $160bn Chinese goods and halving duties on $120bn. The US Treasury Department has also struck China off the currency manipulators list, reversing the decision in August 2019. Cloaked in political and diplomatic niceties, the deal was tweeted by US president Donald Trump as “One of the greatest trade deals ever made!” with “250 billion dollars [that] will be coming back to our Country, and we are now in a great position for a Phase Two start”. President Xi has called it “good for China, the US, and the whole world”—optimism cloaks hard edges.
Under the deal negotiated by vice premier Liu He, China’s concessions include the targeted buy of $75bn of manufactured goods, $50bn of energy, $40bn of agricultural commodities and $40bn in services. The large cachet of manufactured goods from the US includes autos and auto parts, aircraft and semi-conductors. China will buy energy products that include liquefied natural gas, crude oil and petrochemical raw materials. China is also slated to boost US farmers with goods such as seeds, soya beans, pork, cereals, cotton and seafood on the list. These changes will take effect within 30 days of the agreement.
China may not have the drama of elections, but not that the people are not watching the Communist Party (CP) closely. Under Xi, China had begun to flex its political muscle—among others, in the South China Sea, Taiwan, Hong Kong and North Korea. Indeed, China’s “going out” played to a large part of the population, but the CP derives its legitimacy from the economic, and not political mandate nor foreign policy shifts.
In 2018, China’s GDP grew by 6.5% and in 2019, 6.1% (but still within the CP target of 6-6.5%) the slowest in three decades. This is attributed not only to China’s “new normal”—declining demographic dividend, structural changes, shrinking workforce but also trade war, global slowdown and slowing domestic consumption—factors that drove China to make concessions.
China’s message to its own domestic audience is suitably nuanced. The official narrative is an extension of Xi’s line.
This is being reaffirmed through all channels. Vice-commerce minister Wei Jianguo has said that the purchase of agricultural commodities is not a “one-sided obligation” but that the US must provide “good products at competitive prices”. Recently too, Chinese ambassador to the US, Cui Tiankai stressed Xi’s line and that “economic decoupling” would be disastrous. And China Daily, has carried IMF Director Kristalina Georgiva’s statement that the deal would remove “global uncertainty” that has impeded growth.
China’s manufactures will benefit, as will consumers reeling from high prices of pork, milk powder and supplements.
Despite optimism about the trade deal, the issues covered in the agreement are linked to trade with gray areas still under the radar. China’s subsidies earmarked for state-owned enterprises (SOEs), domestic companies and stringent requirements on intellectual property are likely to be covered under ‘phase two’ of the deal.
There are questions as to whether the targets are realistic. China is bound by long-term contracts to buy soyabeans from Argentina and Brazil. The agreement acknowledges that “purchases will be made at market prices based on commercial considerations and market conditions, particularly in the case of agricultural goods, may dictate the timing of purchases within any given year”. He has said that the deal will not affect third-party interests.
The trade deal is not an agreement on further reduction of tariffs. Whether bilateral consultations will thresh out differences remains to be seen. US trade representative Robert Lighthizer has said that expectations are that China will live up to the expectations and that the US will be “actively monitoring data”. Critically, “tech tensions” remain out at the forefront.
The US has not been keen about China’s “Made in 2025”, an ambitious plan that channels support for 10 advanced industries such as semi-conductors, robotics, genomics and artificial intelligence (AI).
While still behind the US, China is steadily making advancements to catch up—in semi-conductors, driverless cars (e.g. Apollo Robotaxi), facial recognition software (employed in Xinjiang) and alternatives to Google Maps (such as Gaode map made by AutoNavi Software Co). Huawei has signed up with Dutch digital mapping company TomTom to provide mapping services and has substituted parts made in the US by sourcing parts from Japan. HiSilicon (semi-conductor company owned by Huawei) is making advanced chips.
Reports suggest that tech tensions are already playing out in the Silicon Valley, where Chinese engineers are having to face visa issues and restricted access to “core technologies”. US Universities are said to be shying about Chinese researchers.
Alarmingly, supply chains have begun to shift out of China to Southeast Asia—Taiwan, Vietnam and Indonesia. And there are skeptics such as Senator Marco Rubio who have warned against American companies “bankrolling China”. Senator Rubio supports the proposed Equitable Act (Ensuring Quality Information and Transparency for Abroad Based Listings on Our Exchanges Act) deemed to delist Chinese companies that do not comply with American laws.
The Chinese like to use “win-win” but this time, it’s “win-win” for the US and President Trump, a great if not the greatest deal.
China’s concessions to buy US farm and manufactured goods will nearly double US exports. China will be stepping up legal protection for patents and pirated goods, refrain from competitive currency devaluation and improve access to its financial markets. It will also refrain from supporting outbound investment plans to meet its own technological requirements. China’s pledge to buy farm goods addresses Trump’s key political constituency, the “Mid-western firewall”—farm states that will be critical in the upcoming elections.
Indeed, President Trump’s Davos 2020 talk about “America’s extraordinary prosperity” was based on the extraordinary political fillip and ammunition of the trade deal.
The writer is Singapore-based Sinologist, and adjunct fellow, Institute of Chinese Studies, Delhi
