The US–China Phase One Fake Out

The first phase of new trade relations has been tentatively agreed to, but how effective will it really be?
December 18, 2019 Updated: December 18, 2019
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Commentary

Is the “phase one” of the trade deal a new beginning in relations between Washington and Beijing?

Perhaps, but don’t bet on it. There are several reasons to look at the deal with a healthy dose of skepticism.

The Timing Is Suspect

For one, the timing of this agreement is very convenient. Beijing has good political reasons to show some kind of progress in the trade war.

From Beijing’s perspective, it could use a win right about now. With the world’s attention focused on the Hong Kong pro-democracy demonstrations for the past six months, the Chinese Communist Party (CCP) has been hamstrung on reacting to the anti-communist protests. The Party has looked rather impotent in that regard.

What’s more, recent reports about the CCP’s mass imprisonment of millions of Uyghur minorities in Xinjiang has put the Party in an even worse light. Beijing has had to announce the release of—if not in fact releasing—many of their Uyghur prisoners.

Then, there’s the global pullback in trade with China. That loss of market share and profit in the United States and the European Union is putting enormous pressure on the CCP to deliver economic performance that just isn’t in the cards at the moment. As both wages and GDP continue to fall, the discontent factor among the Chinese middle class rises. That’s a constituency the CCP neither wants nor can afford to lose.

Add to these rather considerable difficulties the fact that China is suffering from widespread food shortages. An outbreak of African swine fever has resulted in half of its pork stock being culled in 2019 in an attempt to halt the spread of the deadly disease. As a result, in November 2019, China’s inflation rate for food rose to 19.1 percent year-over-year.

Finally, the deadline for another round of tariffs on the remaining $160 billion worth of Chinese goods was coming up on Dec. 15. Trump had already proven that he was willing and able to raise tariffs on more Chinese products. In this last round, cellphones and laptops were targeted, just in time for the big holiday season, which would have been disastrous for China.

Beijing rightly figured it could “make a deal” with President Donald Trump before the deadline, and it did. There is some question as to exactly what China has agreed to in phase one. But in any case, it has allowed China to buy time, relieve some food supply pressures, get some good press, and make the Party leadership look reasonable.

All of those are wins.

Selling the Deal

Of course, highlights of the agreement sound fantastic. The United States has agreed to suspend tariffs on $160 billion of Chinese goods that were scheduled to take effect on Dec. 15. Also, existing tariffs on $120 billion of Chinese goods may be reduced by 50 percent, to 7.5 percent, while 25 percent tariffs on $250 billion worth of goods remain unchanged. That’s easily done by Trump with a stroke of a pen.

China, on the other hand, is potentially on the hook for $50 billion of agricultural purchases in 2020, and perhaps more after that. Will that happen? Who knows.

It’s also agreed that, per the Trump administration, China will make “structural” changes to its economy. That includes opening its market, clamping down on intellectual property theft, and eliminating forced technology transfers.

There’s Less Than Meets the Eye

If one were tempted to regard phase one as the beginning of the end of the U.S.–China trade war, that would be a mistake. The reality is that this “agreement” won’t mean nearly as much in the long term as it seems to at the moment.

That’s because the real crux of the agreement is the “structural changes” that China has supposedly agreed to make. Given that over the past couple of years, Beijing has added even more structural impediments to the free flow of information, and put on stricter controls over state-owned enterprises—it will be fundamentally difficult to implement structural changes to any meaningful degree.

Such structural changes would, by definition, mean more openness and reform in how the economy is managed and run by the CCP. That would likely mean less Party control, not more. That’s a nonstarter for the CCP, and most definitely would not comport with the one-man rule that’s currently in place. Besides that, Party members are keenly aware of how the Soviet Union’s Glasnost and Perestroika (openness and reform) policies in 1986 quickly led to the Party’s demise and the collapse of the entire Soviet Union in 1991.

As for enforcing intellectual property protections and the elimination of forced technology transfers, most of its economic innovation comes from those two policy pillars. The idea that China would adopt such policies is unrealistic.

And yet both are key parts of the phase one agreement. How likely does it seem that those things will happen?

Again, not a good bet. The decoupling of the United States from China has far more momentum and makes far more geopolitical sense from the U.S. perspective. Expect that trend to be the dominant factor going forward.

Where does that leave the U.S.–China trade war and the other aspects of this global rivalry?

Exactly where they were before. Yes, Trump has already announced an effort to get phase two negotiated and signed before the 2020 election. But by then, will China have even fulfilled the commitments it has apparently made in phase one?

James Gorrie is a writer and speaker based in Southern California. He is the author of “The China Crisis.”

Views expressed in this article are the opinions of the author and do not necessarily reflect the views of The Epoch Times.