“Jaw, jaw is better than war, war.” These words of former British prime minister Harold Macmillan (wrongly attributed to Winston Churchill) are the right response to the “phase one” trade agreement between the US and China. The agreement has huge defects of omission and commission. The conflict is far from resolution. US objectives also remain confused and confusing. But the two superpowers have at least reached an agreement. The preamble to the agreement even states that “it is in the interests of both countries that trade grow”. This is a truce, not peace. It leaves a high level of protection in place. Yet a truce is welcome.
The deal itself covers intellectual property, “forced” transfer of technology, agriculture, access for financial services and currency manipulation. It also includes a commitment by Beijing to “import various US goods and services over the next two years in a total amount that exceeds China’s annual level of imports for those goods and services in 2017 by no less than $200bn”. That implies a rough doubling. The agreement, equally notably, includes a tough bilateral dispute resolution system. Finally, the agreement leaves the vast bulk of US tariffs in place, while forgoing — or maybe merely postponing — additional ones.
Note that many of the new Chinese policies announced by the agreement are already in place. As Weijian Shan, a well-informed outside investor, notes in Foreign Affairs, China had begun lifting restrictions on foreign ownership, including in financial services. It has strengthened laws protecting intellectual property. And China has also long since ceased to manipulate its currency. In these areas, the US is pushing on an open door — or at least one that its Chinese counterparts in these negotiations want to open, in China’s own interests. The results will be good for China’s economy.
The agreement does not cover the biggest bugbears in the relationship, notably commercial cyber theft, industrial subsidies and, even more broadly, the Made in China 2025 programme, aimed at upgrading the economy’s technological sophistication. Disputes relating to technological interdependence, notably over Huawei, and supply chains that include Chinese production in areas deemed sensitive for US security are also outside this agreement.
This then is a partial agreement. It is also defective. The most important defect is at the heart of US president Donald Trump’s administration: its lust for quantitative management of trade.
The dominant thrust of this agreement is towards market opening and reliance on market forces, including in currency markets. One can (I would) disagree with the methods used, notably bilateral tariffs of very doubtful legality under World Trade Organization rules. But the objectives at least are consistent with longstanding US policy.
Yet then we see an extraordinary commitment to specific values of Chinese purchases of US goods and services. That is sure to reinforce the state’s role in China’s economy. It is sure, too, to require Beijing to discriminate against competing imports from other trading partners. The US is forcing China to break core principles of non-discrimination and market-oriented policy, in an effort to reduce the overall US trade deficit by reducing its bilateral deficits. This is both ludicrous and dangerous.
Moreover, despite the administration’s efforts, the overall US trade deficit is larger, relative to gross domestic product, than when Mr Trump was inaugurated. This is not surprising: the trade balance is not determined by trade policy. To think otherwise is a basic fallacy.
Nor is this the only huge defect. Another is that this agreement cannot end the uncertainty. Thus, if, in the US view, China is not living up to its side of the deal, it will act against China and, in the last resort, the agreement may end.
Yet there is a more fundamental uncertainty. The US does not know what it is trying to achieve in relation to China. This trade deal is largely about opening up China and so making it a more normal market economy. That would reinforce Chinese integration into the global economy, while making the Chinese economy more competitive. But the deal also seeks to manage trade, which is sure to reinforce the role of the Chinese state. In other areas — again, notably technology and investment in the US — the aim clearly is economic decoupling from China. Coupling? Managing? Decoupling? This disarray reflects continuing US confusion.
Nor is this the only respect in which trade uncertainty will endure, though it may be the most important. It is widely expected that the next stage in the Trump administration’s trade wars will be an assault on EU trade practices. The US has also recently reached agreement with the EU and Japan on the need for tougher global rules on subsidies, aimed at China. That will not mean much without enforcement. But the US has also now neutered the WTO’s dispute settlement procedure, which can only add to the uncertainty and render efforts to upgrade WTO rules irrelevant.
It is a huge pity that the US has in effect taken the issue of China out of the WTO. As Paul Blustein noted in his excellent book Schism, there were viable alternatives. Nevertheless, continuing friction between the two superpowers now seems unavoidable. Agreement on enforceable trade rules may be possible, albeit difficult, in specific areas. But China will never agree to accept permanent economic and technological inferiority. If imposing the latter is the dominant US objective, this is just the early stage of a very long conflict. We may be able to welcome an occasional partial truce like this one. But the war itself is likely to continue indefinitely.