‘Phase two’ trade deal unlikely, say US, Chinese officials

An ambitious “phase two” trade deal between the United States and China is looking less likely as the two countries struggle to sign a preliminary “phase one” agreement, according to US and Beijing officials, legislators and trade experts.

In October, US President Donald Trump said during a news conference with Chinese vice premier Liu He that he expected to quickly dive into a second phase of talks once “phase one” had been completed. The second phase would focus on a key US complaint that China effectively steals US intellectual property by forcing US companies to transfer their technology to Chinese rivals, he said at the time.

But the November 2020 US presidential election, the difficulties in getting the first-stage done, combined with the White House’s reluctance to work with other countries to pressure Beijing are dimming hopes for anything more ambitious soon, the sources said.

The 16-month trade war with China has thrown US businesses and farmers into turmoil, disrupted global supply chains and been a drag on economies worldwide.

Reuters reported on Wednesday that the signing of a phase one deal could slide into next year as the two countries tussle over Beijing’s demand for more extensive cuts to the punitive tariffs the US has imposed since the dispute began.

Officials in Beijing say they do not anticipate sitting down to discuss a phase two deal before the US election, in part because they want to wait to see if Trump wins a second term.

“It’s Trump who wants to sign these deals, not us. We can wait,” one Chinese official told Reuters.

Representative Jim Costa, a California Democrat who sits on two key agricultural committees, said in Congress on Wednesday that “pragmatic” Chinese sources had told him the same thing.

Trump’s main priority at the moment is to secure a big phase one announcement, locking in big-ticket Chinese purchases of US agricultural goods that he can tout as an important win during his re-election campaign, according to a Trump administration official.

After that, China could recede somewhat on Trump’s policy agenda as he turns to domestic issues, the official said, speaking on condition of anonymity. He will probably leave other significantly contentious issues to senior aides, who are likely to continue pushing Beijing over the theft of US intellectual property, its militarisation of the South China Sea and its human rights record, the official said.

“As soon as we finish phase one we’re going to start negotiating phase two,” a second administration official said. “As far as timing around when a phase two deal could be completed, that’s not something I can speculate on.”

The hard stuff

There is broad bipartisan support in the US for Trump’s drive to hold China accountable for years of economic espionage, cyberattacks, forced technology transfer and dumping of low-priced goods made with hefty government subsidies.

But many of these critical concerns will not be addressed in the phase one agreement, which focuses on China’s agricultural product purchases, tariff rollbacks and includes some intellectual property pledges.

“That’s the easy stuff,” said Costa. The harder issues are “industrial espionage, copyrights, complying with those issues, privacy and security issues”.

In an apparent compromise, however, China said on Sunday that it would raise penalties on intellectual property (IP) rights violations and consider lowering the thresholds for criminal punishments against those who steal intellectual property.

China said it is aiming to reduce frequent IP violations by 2022 and plans to make it easier for victims to receive compensation, according to a government statement.

Both countries have a clear interest in getting a phase one deal completed relatively soon to soothe markets and assuage domestic policy concerns, said Matthew Goodman, a former US government official and trade expert at the Center for Strategic and International Studies.

He sees a good chance that the two sides will hammer out some phase one deal, but is far less convinced that a broader deal can be reached before the election. One key problem, he said, was the continued lack of a coherent US strategy for dealing with China.

“I think phase one probably will happen because both presidents want it,” Goodman said at a Congressional briefing last week. But he said China was less willing now to make structural changes that might have been possible in the spring. “They’re not going to do those things,” he said.

Josh Kallmer, a former official with the US Trade Representative’s office and now executive vice president of the Information Technology Industry Council, said it was “technically possible, but hard to imagine” that Washington and Beijing could negotiate a phase two deal in the next year.