Trade war ebb, not end: Trump signs Phase One deal with China

Trade war ebb, not end: Trump signs Phase One deal with China

To paraphrase Winston Churchill, it’s not the end of the US-China trade war, and it’s probably not the beginning of the end. The new Phase One agreement signed today in Washington by Donald Trump and China’s Vice Premier Liu He may only be the end of the beginning. Although the mood at the signing ceremony and presser was celebratory, the limited agreement still leaves significant tariffs in place in both directions while the two countries work on a broader Phase Two:

The U.S.-China trade war is set to enter a new, quieter phase on Wednesday as U.S. President Donald Trump and Chinese Vice Premier Liu He sign an initial trade deal that aims to vastly increase Chinese purchases of U.S. manufactured products, agricultural goods, energy and services.

The Phase 1 agreement caps 18 months of tariff conflict between the world’s two largest economies that has hit hundreds of billions of dollars in goods, roiling financial markets, uprooting supply chains and slowing global growth.

In his remarks at the same presser, Vice President Mike Pence declared that the agreement shows that “the era of American surrender is over.” It might be more accurate to claim that the era is suspended for the moment. It’s good news, but it’s not even close to a final settlement of the trade problem with China.

The length of the congratulatory remarks at the White House — which went on for quite a while — seems almost in inverse proportion to the scope of this agreement. The US did win some initial gains on key issues such as intellectual property protection and access to markets, albeit on a regulated basis. How well those stick, however, will be a question for Phase Two negotiations. This deal is basically an agreement to return to the previous level of the trade war while both sides evaluate how much confidence they have in the other for sticking with a broader agreement.

Thus far the actual text of the agreement has not yet been released, although most of it will get published tomorrow. Treasury Secretary Steve Mnuchin told reporters that China’s specific commitments on commodities purchases will remain confidential, raising a few eyebrows:

This makes sense only if the administration sees this as a transitional, temporary status, but one that will have to hold for a while. The next round might even get broken down into sub-phases, Mnuchin warned this morning, which emphasizes the incremental nature of the progress being made in the trade war:

Treasury Secretary Steven Mnuchin told CNBC on Wednesday that a future “phase two” trade deal with Beijing would ease U.S. tariffs on goods purchased from China even if the next agreements are segmented into multiple rounds.

“Just as in this deal there were certain rollbacks, in phase two there will be additional rollbacks,” he told CNBC. “It’s really just a question of — and we’ve said before — phase two may be 2A, 2B, 2C. We’ll see.”

“The first step is really focusing on enforcement, but this gives China a big incentive to get back to the table and agree to the additional issues that are still unresolved,” he added.

This is also why the US insisted on specific purchases from China rather than settling for softer language on opening markets. The Washington Post’s David Lynch criticizes that approach, but does not take into account the need to establish specific metrics as part of a progression of confidence-building measures:

U.S. presidents for years have tried to settle trade disputes with China by urging Beijing to let the market determine economic outcomes. Now President Trump is content to have the Chinese government decide.

In a trade deal that the president is scheduled to sign Wednesday at the White House, China will promise to purchase specific amounts of American goods and services. Over the next two years, those new orders will total $200 billion in American exports above previous levels.

The Chinese have agreed to dollar targets for services as well as farm, energy and manufactured goods. New sales for American farmers alone are expected to hit $40 billion in the first year, up from $24 billion.

The obvious answer to this criticism is that US presidents for years have failed to get Beijing to allow for open markets. That’s still the goal for an overall agreement, presumably, but for the moment the US has to see concrete progress on exports to China. There’s no other way to structure that in the short term but to force Beijing to meet specific purchase targets. If they comply with those targets, then the broader agreement could potentially move away from that approach to commitments to keep those markets open permanently and allow for normal competition to determine export levels.

So this is a good step forward, but it’s not a particularly striking trade deal for a long-term solution. Trump’s USMCA fits that bill well, a final product that renegotiated the oft-reviled NAFTA. The administration could do that with Mexico and Canada because they generally behave themselves and stick to their commitments. China requires a much different approach, which makes this a sign of progress but hardly a big win. Yet, anyway.

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