US: First Phase Trade Deal Signed with China.

As published on bbc.co.uk, Thursday January 16, 2020.


The US and China have finally - after almost two years of hostilities - signed a "phase one" deal. But it only covers the easier aspects of their difficult relationship, and only removes some of the tariffs.

The biggest hurdles are still to come, and could stand in the way of a second phase agreement - one that would in theory remove all of the tariffs, bringing some much needed relief for the global economy, which is in the interests of all of us.

What's not in the phase one deal tells us where the flashpoints are in the US-China relationship - and what could derail the second round of negotiations.

So what didn't make it into the agreement?

1. Industrial subsidies and 'Made in China 2025'
The deal doesn't address Beijing's ambitious 'Made in China 2025' programme, which is designed to help Chinese companies excel and become world-class leaders in emerging technologies. It also doesn't address the subsidies that China gives its state-owned enterprises, says Paul Triolo of the Eurasia Group.

Washington sees "Made in China 2025" as a direct threat to its supremacy in tech, saying that Chinese companies have only caught up with American ones - at times outpacing them - because they get unfair and outsized assistance from the Chinese government in the form of subsidies.

These were amongst the thorniest issues the Trump administration had with China, but they've been pushed to the phase two process Mr Triolo says, along with "market access in sectors such as cloud services, cyber security and data governance issues".

Beijing maintains it doesn't unfairly subsidise these industries or companies, but the reality is China isn't going to give up dominance in these sectors so easily.

2. Huawei
The trade deal won't reduce US pressure on Huawei, the Chinese telecoms giant that has been caught in the crossfire of the trade war, with the US Treasury Secretary Steve Mnuchin saying the company isn't a "chess piece" in the negotiations.

That will disappoint both Huawei and the Chinese government which have been furious over how Washington has linked the company's fate to the relationship between the US and China.

The Chinese firm became a symbol of the US-China tech rivalry and Washington has been lobbying its allies - including the UK - to not use Huawei's 5G technology services in critical communications infrastructure, alleging it could be used by Beijing to spy on customers. Huawei has denied this and had hoped that if the US-China relationship improved, its fortunes would too.

Analysts tell me that's unlikely. With the signing of this agreement, there's a clear separation between national security and trade, and Huawei and other Chinese companies should still expect the pressure on them to continue. So expect more American export bans not just on Huawei, but on several more Chinese companies and increased US scrutiny on Chinese investments abroad.

3. Access for foreign financial services firms
While the agreement does talk about opening up market access for financial services firms, some analysts have said it doesn't go far enough to ensure they have equal market access.

China had already publicly said that it was opening up its financial services sector, and has recently allowed foreign companies to have a bigger stake in Chinese firms. But Beijing isn't giving up much by doing that, because China's financial services sector is now dominated by domestic digital payment players.

Even if US payment firms do have greater market access to the Chinese market, it's hard to see how they might be able to compete. Whether China sincerely applies its commitments to treat foreign and domestic firms equally will also be watched closely by the Trump administration, and this could be a potential area where the rapprochement could be derailed.

4. Enforcement and interpretation
The deal has a dispute resolution mechanism in place, which basically requires China - once a complaint has been made - to begin consultations with the US, with the onus on Beijing to resolve it.

But what the deal leaves out is "how the US is going to monitor enforcement," says Derek Scissors of the American Enterprise Institute.

"American firms don't like to report intellectual property theft," he told me."So in the first instance what mechanism is the US using to gather information on this. All that is in the document is consultations."

The deal also leaves out how the two sides will interpret these key aspects of the agreement. Already, there are signs of differences. Chinese state media has suggested the dispute resolution mechanism isn't dictated by the US - not entirely in keeping with Washington's messaging.

This could indicate that even though there is an agreement in place, Beijing might ignore it, as Dan Harris of the China Law blog points out.

"The problem isn't the law," he says. "It's that when something is important to China - some cutting edge technology that it wants - then those laws don't have any use at all."

5. Further reductions in tariffs
The deal doesn't include a definitive timeline on when the tariffs that are still in place will go down.

According to research from the Peterson Institute for International Economics, average tariffs on both sides are still up about 20% from pre-trade war levels - six times higher than when the dispute began. That means companies and consumers are still paying more.

Admittedly, the Trump administration has left the threat of tariffs in place as a stick to beat China with - in case Beijing doesn't keep to its commitments.

And there's always that risk, as China's hard line Communist Party mouth-piece the Global Times points out: "Can a preliminary trade agreement, reached during a period when China-US strategic relations are clearly declining, really work? Will it be replaced by new conflicts or further progress as negotiations continue?"

The potential for trade tensions to resume on both sides is still a very big possibility.

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