It is unrealistic to assume the Phase-1 deal would end the US-China trade war, the underlying causes of which are systemic and linked to geopolitical rivalry.
Phase 1 of the US-China trade deal marks cessation of retaliatory trade actions that the two countries have been engaging in for nearly two years now. But, it doesn’t mean that trade friction between the two countries has come to an end.
The fact that both countries continue to view each other suspiciously is evident from the fact that the tariffs they imposed on each other’s products over the last twenty months remain in place. The deal has not, at least till now, ensured that both countries remove the tariffs on a large number of bilaterally traded items that were set in motion after the Section 232 tariff impositions by USA on steel and aluminum imports. While these tariffs affected steel and aluminum exports to the US by various countries, including India, the later tariffs imposed by the US, specifically on Chinese products, were justified under Section 301. Section 232 tariffs are brought in on national security grounds. Section 301 tariffs, on the other hand, are driven by unfair trade practices by US trade partners—in this instance, specifically by China. None of these tariffs, imposed at various points in time by the US, are going to go. The ones imposed by China, in retaliation, are also going to stay.
What does the deal achieve then? Much of the outcome is symbolic. The symbolism is of far greater significance for the US. Unilateral tariff actions were begun by the US. It is far more important for the US, therefore, to demonstrate that it was able to fork out a deal that made the trade war worthwhile. But, does the deal justify the trade war?
The core elements of the deal are intellectual property, technology transfer, agriculture, financial services, currency, foreign exchange, and dispute resolution. It is important to note that the core US angst against China was the ‘unfair’ practices maintained by the latter on various aspects of managing IP, and technology transfer. From the fact sheet released by the USTR on the subject, it is not clear exactly what the specific commitments made by China for safeguarding IP content, primarily by acting on piracy and counterfeiting, are about. On technology transfer, the fact sheet claims that for the first time in any trade agreement, China has agreed not to pressurise ‘…foreign companies to transfer their technology to Chinese companies as a condition for obtaining market access, administrative approvals, or receiving advantages from the government’. What exactly the commitment by China in this regard might be is unclear and won’t be known till the text of the deal sees the light of day. But, if Chinese authorities wish to block market access for foreign companies as a negotiating chip to obtain knowledge of technology, they might well be able to do so through various other means. The mere ‘agreement’ provided in consultations and negotiations is insufficient for what the US was looking to achieve. Perhaps, the US trade negotiators also know this only too well. It remains to be seen how China fares following the deal, in future Section 301 investigations, and the US IP watch. There is not much to suggest that the outcomes of these investigations would change dramatically.
On symbolism, a point the US trade authorities would wish to sell firmly to domestic constituencies is the commitment by China to remove a large number of non-trade barriers on US agricultural exports. Equally high on the symbolism quotient would be the Chinese commitment to buy more of various US goods and services. Both assume importance at a time when the US is heading into its next Presidential elections with the knowledge that trade war and tariff actions have not really delivered American producers the goods they promised to do. Less politically symbolic, but nevertheless strategically important, would be emphasis on commitments by China to refrain from unfair exchange rate practices and currency manipulations.
Principally, the deal, the way it has come out from US official agencies, underpins a situation where a naughty, ill-behaved kid (China) has promised to behave in the future, following stern action (tariffs) by a strict guardian (the US). The US is keen to build the deal as evidence of the success of its efforts to put China ‘in line’. Whether that actually is the case will only be known in future. China’s ability to restrict market access through creative protectionism, notwithstanding official grant of concessions in several respects, is well known, and visible from the trade policy actions following its accession to WTO. Over the years, China has taken to blocking market through a variety of complex, internal ‘beyond the border’ domestic regulations rather than ‘on border’ restrictions, like tariffs. It might continue to do so, notwithstanding US pressure.
It would be unrealistic to assume that the Phase 1 deal would bring to an end the US-China trade war. The underlying causes behind the US-China friction are systemic, and linked to their overall efforts to gain a geopolitical edge over each other through technology-driven economic supremacy missions. More is expected to happen in the foreseeable future. The onus of such developments, till now, has been with the US. It remains to be seen whether China begins a new fold of response to the hostilities. Critical issues like data governance, and surveillance concerns arising out of suspicions over Huawei remain untouched in the deal. Symbolic commitments might not be enough to keep both countries away from locking horns on the ‘alive’ issues soon again.
Senior research fellow & research lead (trade and economic policy), NUS. VIews are personal