The Economist - USA (2019-12-21)

The EconomistDecember 21st 2019 Finance & economics 99

A

merican tradedeals typically stretch
to thousands of pages. The new “phase
one” trade deal between America and Chi-
na takes up only 86. Wang Shouwen, the
Chinese deputy representative of interna-
tional trade negotiations, described a text
with nine chapters, including ones on in-
tellectual property, technology transfer, fi-
nancial services and dispute settlement.
Robert Lighthizer, the United States Trade
Representative (ustr) gave journalists a
glimpse of it on December 13th, hours after
it had been agreed. It is due to be signed by
both sides in the new year.
Mr Lighthizer said that American tariffs
on around $120bn of Chinese imports
would be reduced from 15% to 7.5%. Fresh
tariffs due on December 15th were can-
celled. In return, he said, China would
ramp up imports of American agricultural
products, manufactured goods, energy
products and services by $200bn over two
years. Negotiators had set targets for va-
rious categories of commodities, so that
agricultural purchases would rise from a
baseline of $24bn in 2017 to at least $40bn
in 2020 and 2021. The exact figures would
be secret to avoid influencing markets.
These arrangements are sure to attract
criticism. It is hard to see how China will
meet its targets while sticking to the World
Trade Organisation’s principle of non-dis-
crimination. Joe Glauber of the Interna-
tional Food Policy Research Institute, for-
merly chief economist of America’s
Department of Agriculture, warns that oth-
er countries, in particular Australia, Brazil
and Canada, may have objections. He also
questions the secrecy regarding the tar-
gets, asking “how else would producers get
signals on what to plant?”
China, for its part, does not like the idea
of becoming so reliant on America for im-
ports of commodities such as soyabeans. It
had long insisted that it was unrealistic for
President Donald Trump to demand that it
double its purchases of agricultural pro-
ducts from America. Intriguingly, after the
new deal was announced it refrained from
mentioning any numerical targets. Wheth-
er that is because it is embarrassed about
having been forced into such a concession,
or because the purchase agreements are
not as solid as American officials suggest,
will become clear only when the text is
eventually published.
The Chinese do, however, seem to have
made some welcome promises. Mr Light-

hizer boasted of commitments on intellec-

tual property similar to, albeit narrower

than, those in the usmca, a recently agreed

trade deal between America, Mexico and

Canada. He also said the Chinese authori-

ties had agreed not to ask multinationals to

hand over technology as part of the process

of securing a licence to do business—an is-

sue central to America’s first tariff action in

the trade war. Jake Parker of the us-China

Business Council, a lobby group for Ameri-

can companies operating in China, notes

that such tech transfer was the biggest con-

cern for many of his group’s members.

The Chinese, for their part, insisted that

their promises were in line with their

broader economic strategy of opening up,

and would improve the business environ-

ment. Indeed, cynics will note that many of

the reforms being chalked up to the deal

had already started, raising questions

about whether the nearly two-year-long

trade battle has made much difference.

Until the deal is signed, the threat of re-

newed trade hostilities remains. And even

then, the enforcement rules will cause

anxiety. Mr Lighthizer, hardly an indepen-

dent arbiter, will have the final say over

whether China has broken its commit-

ments. He will be able to consider anony-

mous complaints by American companies.

This fixes a real problem—fear of retalia-

tion that leads executives to hold their ton-

gues. But it also risks the Chinese feeling

that they are being accused of misdeeds

they can neither verify nor easily fix.

Both sides said that the success of the

first phase of talks would determine suc-

cess in the second, which would presum-

ably unlock further tariff cuts. Mr Light-

hizer spoke of climbing a mountain a bit at

a time. But the summit is still distant. 7

WASHINGTON, DC
A “phase one” deal sees new tariffs cancelled. But the ceasefire is fragile

US v China

Trade truce

Supply-chain reaction

Sources:PetersonInstituteforInternationalEconomics;PanjivaResearch;CensusBureau;ITCTradeweb

UStariffson

Chineseexports

Chinesetariffs

onUSexports

25

20

15

10

5

0

2018 2019

Average tariff rate, %

United States

Mexico

Britain

Philippines

Taiwan

Vietnam

-10 -5 151050

Chinese exports to selected countries, % change

12 months to Oct 2019, compared same

period a year earlier

50

40

30

20

10

0

2016 17 18 19

US imports from China by tariff tranche, $bn

List 1

Jul 2018

List 2

Aug 2018

List 3

Sep 2018

List 4A

Sep 2019

List 4B

Dec 2019

(suspended)

0

-30

-60

-90

-120

-150

-180

Q1 2018 Q3 2019

US bilateral trade deficit, $bn

Rest of world

Mexico

Japan

China

After an apparent detente between America and China in late 2018, trade relations

soured again at the start of 2019. Over the course of the year America ratcheted up

tariffs, and its bilateral trade deficit with China fell. But market forces are powerful, and

trade finds a way. America’s bilateral deficits with several other countries, including

Mexico, rose. Meanwhile Chinese exporters found new homes for their goods, including

Vietnam and the Philippines. Next year is likely to see trade patterns further disrupted,

as Chinese policymakers aim for a Trump-pleasing increase in imports from America.

How US-China trade has changed