Fears grow that a phase two accord between Beijing and Washington will struggle to get off the drawing board
Great expectations were replaced by even greater euphoria after China and the United States finally hammered out a phase one trade deal just before Christmas.
A pause in the two-year-long economic conflict also produced a collective sigh of relief.
On Wednesday, Vice-Premier Lui He finally signed the limited agreement in the White House under the gaze of US President Donald Trump. But even before the ink was dry, cracks were starting to appear in this latest incarnation of détente.
“Since the global financial crisis, Western analysts have used multiple labels to describe China’s political and economic systems. They have even said China’s ‘state capitalism’ poses a challenge to the ‘Washington Consensus,’” Zhao Minghao, of the Charhar Institute, a Chinese think tank, said.
“Whether it likes it or not, Washington has to accept the fact that China will not follow the US economic development model. The US can no longer force China to accept its demands now that it is the world’s second-largest economy,” he wrote in an Op-Ed for China Daily, the leading state-run English-language newspaper.
Zhao then went on to point out that a broader phase two accord will depend on how Beijing and Washington respond to those “significant differences.”
The chances of that happening are looking increasingly remote.
At 96 pages, the deal signed in the American capital appeared rather anorexic, although it did cover some weighty issues. Key elements involve:
China has agreed to buy an additional US$200 billion in US exports based on 2017 levels in the next two years.
The breakdown is as follows: an additional $32 billion in agricultural goods, $52.4 billion of energy exports, $77.7 billion of manufactured goods and $37.9 billion of services.
The agreement also covers briefly the subject of forced technology transfer to Chinese rivals and US intellectual property rights.
There is also a vague reference to Beijing’s decision not to “support or direct” acquisitions and investment by Chinese companies of tech “industries targeted by its industrial plans that create distortion” such as the Made in China 2025 policy.
To oversee the accord, a Bilateral Evaluation and Dispute Resolution Arrangement has been put in place, allowing Washington and Beijing to monitor the implementation of the phase one deal.
Failure to live up to the agreement could result in renewed US tariffs.
In exchange, Washington has already frozen planned tariffs worth $160 billion on Chinese imports, which were due to kick-in on December 15.
Duties imposed in September on goods valued at up to $120 billion will be halved to 7.5%. The reductions will take effect in 30 days.
But tariffs imposed earlier on Chinese imports to the US worth $250 billion will remain at 25%.
“Today, we take a momentous step, one that has never been taken before with China,” Trump said at the White House signing ceremony.
“Since China joined the World Trade Organization two decades ago, we have racked up nearly $5 trillion – the Vice-Premier [Liu He], I hope he’s not listening to this – in trade deficits, lost millions and millions of manufacturing jobs, and saw tens of thousands of factories close,” he added.
Liu might have picked up that remark but he was decidedly circumspect after reading out a letter from his boss President Xi Jinping.
“[The agreement] was good for China, for the US and for the whole world. It also shows that our two countries have the ability to act on the basis of equality and mutual respect,” Xi said, adding that he would “stay in close touch with” Trump “personally.”
His Vice-Premier’s response was distinctly understated. This will “considerably address” US “concerns,” he said.
Analysts were more outspoken as they consigned the chances of a phase two accord to the trash heap of history. Last week, Trump made it clear that it would only happen after the American presidential election in November … at the earliest.
Robert Lighthizer, the US Trade Representative, was more pragmatic after playing a key role in the negotiations. “The second phase is going to be determined [in part] by how we implement phase one, right down to every detail,” he told the CBS news network.
“[Phase one] gives procedures, it gives penalties, it sets standards,” he added at a media briefing.
Still, the most crucial issue remains. Beijing’s state-run model has blurred the line separating private enterprise and the sprawling government-owned sector. In short, a blend of capitalism with Communist Party characteristics has become the dominant factor in China’s economic blueprint.
For team Trump, that is a bone of contention. For Xi and senior CCP officials, a red line that cannot be crossed.
An editorial in the Global Times, which is owned by the People’s Daily, Beijing’s mouthpiece, underlined the “paradox”:
“Huge uncertainty remains … Can a preliminary trade agreement, reached during a period when China-US strategic relations are clearly declining, really work? How long can it last? Will it be replaced by new conflicts or further progress as negotiations continue?”
Where we go from here is uncertain. But the challenges ahead are significant and daunting.
A note from Capital Economics, the London-based research consultancy, spelt out the reality behind the hype.
“There is no timetable for further negotiations on state subsidies and the other structural concerns of the US side. Talks may resume at some point but a substantive phase two deal on structural issues is unlikely ever to be signed,” it stated.
“The two sides’ inability to reach agreement on structural issues means that the shadows these are casting over the bilateral relationship will remain,” Capital Economics added.
So much for great expectations.