Is the trade war over? A follow up from October considering the Phase One Trade

Brynn O’Connell is a final year War Studies student with an interest in political economy and geo-economics. In this article she continues her analysis on the US-China trade war.

 

In light of the Phase One trade deal, some have heralded the end of the US-China trade war. While the trade deal certainly offers a much welcome relief to both economies, I caution against declaring the end of the trade war just yet. Rather than a peace treaty, the deal is more akin to a ceasefire. A broader reading of US-China relations leaves the observer unsatisfied with the trade deal due to its narrow and selective focus. Essentially, the Phase One trade deal does little to bridge the gap between increasingly divergent national interests. Of course, some would argue this is only Phase One so to expect a monumental deal bridging political and economic differences in unrealistic. For this argument to hold water, though, this US-China relationship would have to endure past one phase, and the content of the trade deal offers little incentive for the Chinese to stay the course. While the trade war may be subsided and perhaps economic rivalry will be reduced in coming months, the Phase One trade deal does not bridge differences enough to confidently declare the end of animosity and may even exacerbate future economic tensions between the US and China.

 

In my previous article, I outlined the geopolitical context driving the US-China economic rivalry. Essentially, this context is China’s ability to increasingly influence the world system, especially in relation to developing countries through the Belt and Road Initiative (BRI). While the Trump administration has pursued more isolationist, less globalist policies, his administration has also pursued nationalist policies focused on showing strength. China’s pursuit of extensive growth through the markets in developing countries threatens the US, not necessarily because of competition with US goods but because of the influence China has gained in these countries making it more difficult for the Trump Administration to “show strength”. For example, take Pakistan. A US ally throughout the Cold War and a key player in the War on Terror is now increasingly friendly with China as it is ‘the centrepiece of BRI’.[1] Geopolitics provides the backdrop for the US-China economic rivalry. Of course, there are more immediate causes accompanying this, such as US surging fiscal debt and US perception that China has pursued unfair economic and fiscal policies.[2] Essentially, though, the trade war boils down to a conflict over hegemony, be that geopolitical or economic.

 

The issue with the Phase One trade deal is it does little to resolve the issue of hegemony. To save people from reading all ninety-one pages, here are the main points of interest. In general, the trade deal can be described as placing significantly more requirements and regulations on China. This is especially apparent in the sections on intellectual property rights and patents. Furthermore, China has committed to deregulating certain agricultural products to allow greater entry of US goods.[3] China has also committed to increasing transparency in regards to currency manipulation, specifically disclosing foreign exchange reserves and quarterly imports of goods and services.[4] This is not particularly striking though as much of this is in line with China’s prior commitments to the Group of 20 and obligations to the IMF.[5] The most striking aspect of the deal is that China has agreed to buy an additional $200 billion of American goods and services by 2021 from the 2017 statistic.[6] By comparison, the US concedes very little. The phrase ‘The United States affirms that existing US measures’ appears in the document twenty-seven times. The phrase ‘the United States shall’ appears five times. By comparison the phrase ‘China shall’ appears ninety-seven times.

 

There is obviously a great discrepancy in commitments within the Phase One trade deal and on the surface, this appears to be a big win for the Trump administration. However, there are several key problems. First of all, what is concerning is what is not mentioned in the Phase One deal such as a commitment from China to improve efforts to combat Cyber theft into US commercial networks. Once a key demand for the reduction of tariffs, in April of 2019 President Trump dropped this after Chinese pushback.[7] Furthermore, the agreement does not address China’s practice of subsidising certain industries which has long been criticised by the US as a violation of WTO rules. The deal is also strictly concerned with specific issues of economic tension and does not even approach addressing more macro issues such as US-China competition over influence in developing countries or areas of political tension.

 

Secondly, the Trump administration’s big win may not actually manifest in victory. China’s commitment to purchase an additional $200 billion of American goods and services from the 2017 statistic is highly unrealistic and potentially dangerous to macroeconomic balances. Because exports to China fell by 15.9% through November 2019, if applying the same decline to December, exports to China from the US in total fell by approximately $20.6 billion from 2017.[8] With this decline accounted for, the export goal for 2020 is an increase of 77% from the 2019 total ; the export goal for 2021 would then be an increase of  109%  from the 2019 total.[9] This will be especially significant for US soybean farmers who were particularly hurt by the trade war, losing their biggest customer. However, this monumental increase in exports to China does not necessarily mean stability for soybean farmers; as Evan Medeiros of Georgetown University comments, this deal turns Chinese purchases of US agriculture into an uncertain variable that is now even more vulnerable to the instability of US-China relations.[10] Given the narrow focus of the deal, there are a host of issues left unresolved that could escalate tensions between the US and China – for example China’s military build up in the South China sea where just this week a U.S. Navy warship sailed past disputed islands.[11] Furthermore, it is questionable whether China will seriously attempt to meet this quota. China’s vice premier who signed the deal claimed Chinese businesses will buy American goods and services “based on the market demand in China” suggesting China may not view the targets as firmly as the Trump administration.[12] If China fails to meet these targets, this will trigger the dispute mechanism. Rather than having a third party settle disputes, the dispute resolution arrangement is “bilaterally” done between China and US. Although the dispute resolution starts negotiations at lower levels, this mechanism outlines for negotiations to restart at the highest levels of government.[13] If a resolution is not met, tariffs could escalate again and the world would be back into a trade war. And even if, by some miracle China did meet these targets by 2021, ‘there will still be a $200 billion plus deficit that year’[14] meaning the Trump administration’s big grievance has not really been resolved.

 

It is too soon to herald in the end of the trade war, let alone the start of a more cooperative US-China relationship, because the Phase One trade deal, more than anything, postpones key issues to be resolved at a later phase. Of course, one has to start somewhere, but this is increasingly difficult given the many requirements placed on China. Perhaps this was the best deal that could have been made at this point, and if so then the Trump Administration may deserve a pat on the back. It is impossible to tell as an outsider looking in whether a better deal could have been accomplished and therefore the question of whether the Phase One deal is a “good” or “bad” deal is difficult to answer. In fact, it is not the question we should be asking. We should be asking, “Does the Phase One trade deal significantly contribute to resolving US-China tensions?” Given the content or rather the lack of content in the deal, it is very difficult to answer “yes” to this question. Therefore, the world should prepare for the eventual resumption of US-China tensions, be that economic, political, or – although unlikely – even militarily. This is not the of the trade war, only the end of a battle.

 

Citations:

[1] Hurley, John, Scott Morris, and Gailyn Portelance, “Examining the Debt Implications of the Belt and Road Initiative from a Policy Perspective”, (Washington, DC: Center for Global Development), 2018.

[2] Di, Dongsheng, Gal Luft, and Dian Zhong, “Why Did Trump Launch a Trade War? A Political Economy Explanation from the Perspective of Financial Constraints,” Economic and Political Studies 7, no. 2 (March 2019): pp. 203-216; Politi, James “US Lifts China ‘Currency Manipulator’ Tag Ahead of Trade Deal,” (Financial Times, January 14, 2020), https://www.ft.com/content/de8790be-3628-11ea-a6d3-9a26f8c3cba4;Bradsher, Keith and Ana Swanson, “U.S.-China Trade Talks Stumble on Beijing’s Spending at Home,” The New York Times (The New York Times, May 12, 2019), https://www.nytimes.com/2019/05/12/business/china-trump-trade-subsidies.html.

[3] “Economic and Trade Agreement Between the Government of the United States of America and The Government of the People’s Republic of China”, 3-1 §, https://ustr.gov/sites/default/files/files/agreements/phase%20one%20agreement/Economic_And_Trade_Agreement_Between_The_United_States_And_China_Text.pdf

[4] Ibid, 5-2.

[5] Eavis, Peter and Alan Rappeport, “U.S.-China Trade Deal: What’s in (and Not in) the Agreement,” The New York Times (The New York Times, January 15, 2020), https://www.nytimes.com/2020/01/15/business/economy/china-trade-deal-text.html.

[6] “Economic and Trade Agreement Between the United States and China”, 6-1.

[7] Politi, James “Trump Drops Cyber Theft Demands in Bid for Swift Trade Deal with China,” Subscribe to read | Financial Times (Financial Times, April 30, 2019), https://www.ft.com/content/3cb5bfda-6b0e-11e9-80c7-60ee53e6681d.

[8] Jones, Chuck “Phase One U.S. China Trade Goals Are Insurmountable,” Forbes (Forbes Magazine, January 19, 2020), https://www.forbes.com/sites/chuckjones/2020/01/18/phase-one-us-china-trade-goals-are-insurmountable/.

[9] Ibid.

[10] Eavis and Rappeport.

[11] Ohnson, Jesse, “U.S. Navy Sails Warship near Disputed Islands in South China Sea for First Time in 2020,” The Japan Times, accessed January 28, 2020, https://www.japantimes.co.jp/news/2020/01/28/asia-pacific/us-navy-warship-disputed-islands-south-china-sea-first-2020/#.XjAjTWj7SUk.

[12] Evis and Rappeport.

[13] “Economic and Trade Agreement Between the United States and China”, 7-1.

[14] Jones, Chuck.

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