‘Phase 1’ trade truce makes sense for both US, China
“Nobody wants a trade war,” but the long-lasting trade conflict between the world’s two largest economies, the United States of America and the People’s Republic of China, just reached a truce after almost two years.
On March 22, 2018, US President Donald Trump directed the United States Trade Representative ( USTR) to start investigating China’s “unfair” trade practices under Section 301 of the Trade Act of 1974. At that time, optimists believed that a trade war would probably be avoided as it was highly possible for the two countries to reach a deal quickly, while pessimists warned that more friction between the two nations far beyond trade was yet to come, and even that a “new cold war” was brewing. Neither side has been proved totally right.
In the past two years, the US and China held several rounds of “tough” trade negotiations, difficult but making some progress. Last month, a preliminary deal was announced.
On January 15, the long-expected “Phase 1” trade deal between the two nations was signed at the White House by Trump and Chinese Vice-Premier Liu He.
Negotiation is an art of compromise. Clearly, both sides made certain compromises to reach the deal. On China’s side, Beijing agreed to increase purchases of US manufacturing, energy and agricultural goods and services by at least US$200 billion over two years, to enhance protections for intellectual property, to root out forced technology transfers, and further open its financial market, among other concessions.
To save “face,” Chinese officials emphasized that those compromises were actually in line with Chinese consumers’ growing appetite for US products and the nation’s general direction of deepening reform and opening-up, as well as its inherent need to promote high-quality economic development. In other words, China did not give in simply because of US pressure.
On the US side, its compromise seemed to be simpler – reducing both existing and planned tariffs on Chinese products. However, in fact the biggest concession Washington made was to leave those thornier issues to next phase of negotiation, such as government subsidies and state influence in China’s domestic industries. In the Phase 1 deal, the two nations also agreed to abide by the International Monetary Fund’s principles on avoiding the manipulation of exchange rates. Just before the signing, the Trump administration revoked its decision to label China a currency manipulator.
Some said the Phase 1 deal was not a real victory for either China or the US. However, it is much better than no deal at all. It was clearly welcomed by the business community, and most stock markets around the world rallied because of it. Chinese President Xi Jinping called the deal “good for China, for the US and for the whole world,” while Trump called it “a momentous step, one that has never been taken before with China, towards a future of fair and reciprocal trade.” More important, the two nations need the deal urgently, because 2020 is an important year for both.
For the US, the next presidential election will be held this November. Trump wants to win a second term, and the Phase 1 deal has been largely flaunted by him as a credit.
For China, this year will mark the achievement of its “first centenary goal” of building a moderately well-off society in an all-around way and eliminating absolute poverty in China. China prefers a peaceful environment both within and outside of the nation. Trump will travel to China “at a later date” to begin talks on the second phase of the agreement before the coming presidential election. That is good, as dialogue is always better than confrontation.
During his China trip, Trump will talk directly with Xi, and likely address more significant concerns, particularly China’s industrial policy and subsidies of state-owned enterprises. Symbolically, Trump may even try to urge China to change its so-called “state capitalism” economic model, although the possibility for China to accept the request is very low, because it is a critical issue related to China’s major national interests and the stability of the Communist Party regime. Trump will surely use the visit to benefit his presidential campaign. Surprisingly, many Chinese people hope Trump can be re-elected, because they view him as a game changer and a strategic gift for China in the long run, although he has been causing China many troubles in the short run.
In fact, the logic is rational. After three decades of reform and opening-up, China has been facing resistance to further reform from many vested-interest groups. The trade war could be viewed as another chance of a breakthrough from outside, like China’s accession to the World Trade Organization in 2001.