US-China trade tensions loom, even after phase one deal

While the phase one trade deal between the United States and China aims to harmonise the world’s two largest economies, it will not resolve many of their deepest disagreements. And their possible decoupling poses significant political and economic risks for billions of people around the globe. 

The interim agreement to be signed on Wednesday keeps most of the existing tariffs through 2020, and puts off a possible attempt to narrow the profound gaps in several key areas.

Myron Brilliant, an official at the US Chamber of Commerce, said the phase one deal “stops the bleeding” and represents “a sigh of relief from both sides” – but leaves significant challenges intact.

Robert Atkinson, president of the Information Technology and Innovation Foundation, said the deal “does not address the important areas of concern regarding China‘s rampant mercantilist, unfair trade and economic policy practices”.

“It is essentially a time out from escalation,” he told Al Jazeera.

Certainty, confidence?

Optimists hope that resolution of the central problems in the bilateral trade dispute will become easier down the road. However, trade experts are not so sure there will be a rush of businesses eager to navigate the intricacies of the trade deal.  

“I don’t think it builds a lot of certainty and confidence,” said Edward Alden, a senior fellow at the Council on Foreign Relations. 

The deal leaves many of the tariffs in place, and “because the US government has been using a variety of other tools – export controls, investment restrictions, technology restrictions – that makes it difficult for companies to know what’s permitted, and what’s not, in their economic engagement with China,” Alden told Al Jazeera.

“Two big things remain unresolved,” said Alden. “The biggest is China’s subsidies of all sorts: the various forms of assistance that the Chinese state provides to industries to give them a competitive advantage.”

“China is trying to subsidise its way into global leadership in critical industries,” he added. “This deal is silent on that issue.”

Alden said the other crucial question – dependent on the specific language about intellectual property in the accord – is “whether China can effectively force foreign companies to share their technologies, as the price of entry into the Chinese market”.

He added that even a future phase two agreement likely would not “address the core differences in structure between the US and Chinese economies”.

As the phase one agreement’s finalisation was announced last month, US Trade Representative Robert Lighthizer said that it does cover one of the main US concerns: enforcement. Yet doubts linger about whether the enforceability mechanism – essentially the threat of additional tariffs – is robust enough.

Decoupling or detente?

The deal hinges on the cancellation of 15 percent US tariffs that had been scheduled to take effect December 15 on $160bn in exports from China.

However, the US will retain tariffs on $370bn in imports from China. The US has import taxes of 25 percent on $250bn in Chinese goods and tariffs of 7.5 percent on another $120bn of goods.

Meanwhile, China has levied tariffs on $120bn in exports from the US. Eventual tariff relief in a subsequent deal could, in theory, see all of these nixed.

But perhaps even more importantly, Beijing’s subsidies for government-owned firms and technology-transfer policies are next on the top of the US agenda.

Experts also worry that China could face trouble trying to sustain the promised increase in agricultural imports from the US – largely soya beans and pork – as part of the phase one arrangement.

Reuters reported on Tuesday that China committed to buying almost $80bn of additional manufactured goods – mostly cars and aircraft – as well as $50bn in energy supplies and $35bn in services over two years. 

The details of the 86-page pact, initially reached on December 13, were not released prior to the ceremony in Washington with China’s Vice Premier Liu He.

The modest deal is seen as a first step in ending the 18-month spat between the trade heavyweights. Even so, trade and investment flows continue to slow.

At heart, both China and the US look to minimise the other’s influence and prevent economic or military sabotage.

For the countries to forge new high-tech hardware supply chains would take massive investment, further disrupting the system of alliances that undergirds US geopolitical might and that buttresses China’s export-centric economic model.

A disengagement that forces dozens of countries to choose either one power or the other could have a tremendously destabilising effect.

The cost of waging a trade war

The bilateral price already paid is not cheap, with US farmers having lost billions in agricultural income, companies ailing from absorbing the cost of tariffs and consumers bearing the brunt of price increases.

And while the mini-agreement does not completely smooth over those financial headaches, it reduces global-trade unpredictability at a time when no truce at all could have left markets teetering on the brink of major disruption.

The trade war has few winners. But at the same time, incumbent US President Donald Trump can declare tactical victory in an election year, and China is able to buy time before making any drastic decisions one way or the other towards decoupling.

“Beyond the tariff-removal accomplishments, this ‘victory’ rings hollow for both sides,” said Weijian Shan, an economist based in Hong Kong.

“The deal from December does not mark a major breakthrough, nor does it come close to fixing the most contentious issues that separate the two countries,” he told Al Jazeera.

Shan added that both nations must seriously consider options for real compromise.

“The US side has presented a few Chinese pledges as concessions to US complaints about Beijing’s trade practices,” said Shan. “But most of the announced measures are existing policies.”

China had initiated some reforms to currency-exchange policies, foreign ownership limits and intellectual property rules before the trade war started. But it could speed up change in its state-owned sector.

The US strives to protect its values: the rule of law, open markets and free speech. Yet the conflict is over economic dominance for the industries of the future: artificial intelligence, robotics, biotech innovation and other sensitive scientific areas. 

Part of what sweetened the deal this week was Trump’s decision to lift the designation of China as a currency manipulator.

Yet doubts remain over a trade deficit that widens when cheap exports from China stay so attractive for Americans because of the strong US dollar. Meanwhile, the US simply has not managed to recreate the 3.7 million manufacturing jobs lost since China joined the World Trade Organization in 2001.

“The US must decide what it wants: access to the Chinese market with better prices for its consumers or the containment of China’s rise at all costs,” said Shan. “Washington simply cannot have it both ways.”