US economy

Detente in US-China trade war hinges on tricky implementation


Even in the euphoria of finally reaching a trade deal with China following months of tempestuous talks, US trade representative Robert Lighthizer struck a wary tone on whether Beijing would follow through on the pledges it had just agreed. 

“We think it was a good negotiation and will make a real difference. A sceptic would say we’ll see, that’s probably a wise position to take,” Mr Lighthizer told reporters on Friday. “But our expectation is they will keep their obligations.” 

The limited agreement between Washington and Beijing to pause their trade war has cheered markets and lifted a huge cloud hanging over the global economy heading into 2020.

For Mr Trump, it offered political respite from the impeachment proceedings and another economic accomplishment after sealing a separate deal with Democrats to allow congressional ratification of a new trade pact with Canada and Mexico, replacing Nafta. 

But the Chinese detente is heavily dependent on the success of a tricky implementation phase over coming months — during which the Trump administration will scrutinise every economic step taken by Beijing to make sure it is consistent with their pact.

This could determine whether the truce evolves into a much more ambitious and comprehensive trade deal, or breaks down in some manner. Few observers are betting on the former.

“Any improvement in relations is likely to be temporary with tensions, on both trade and other issues like technology, continuing to wax and wane for the foreseeable future,” said Elena Duggar, associate managing director at Moody’s Investor Service. “Any partial deal in the short term will not resolve the fundamental differences in the two countries’ economic, political and strategic interests.” 

US officials have only released a short summary of the agreement, not the full 86 pages that will be signed with China in early January. Even if no strains emerge before then as the text is put through translation and legal review, potential flashpoints are already apparent.

The US has set a target of at least $40bn in annual farm sales to China, which is crucial to hit for Mr Trump’s reputation with Midwestern farmers, but Chinese officials have not confirmed any numbers and are insisting that any purchases should be based on market forces and be consistent with WTO rules. 

A second source of strain will be that the other limited concessions made by Beijing — on protecting US intellectual property and stopping the forced transfer of technology away from US companies — still have to be reflected in practical steps with regards to US investments, which could disappoint.

At that point, any hope of a quick move to a second stage deal tackling the biggest US concerns regarding trade with China — from industrial subsidies to the use of state-owned enterprises, to cybertheft and digital trade — would falter.

A few months of relative bonhomie are still likely between the US and China, however — a marked contrast with recent frostiness that will be a relief for both countries.

Mr Lighthizer said he had “no expectation” that the US would return to raise tariffs against Chinese goods in a new flare-up, and that the planned levies due to hit a batch of Chinese imports on Sunday had been delayed indefinitely.

“I think the deal will stick. I think there will be some problems, but I think both sides will have an incentive to resolve them before they go ahead with any new tariffs,” said Wendy Cutler, a former US trade negotiator now at the Asia Society Policy Institute. 

While China will maintain retaliatory tariffs that have already been imposed on US imports, the country’s Ministry of Finance said on Sunday it would temporarily suspend planned 5 per cent and 10 per cent tariffs on 3,361 categories of goods ranging from caviar to scooters that were scheduled to take effect at the weekend.

Although Mr Trump remains supremely unpredictable, Ms Cutler suggested that in combination with last week’s agreement with congressional Democrats to approve the Nafta replacement, and an agreement with Japan reached in September, the administration seemed to have moved to a more “pragmatic and realistic” approach on trade.

“They had to recognise the red lines of our trading partners and work around them,” she said.

On a trip to Qatar Steven Mnuchin, the US Treasury secretary, seemed to bask in the unfamiliar feeling that the US might actually be reducing uncertainty around the world.

“These agreements will not only be good for the US, but will be very good for global growth,” Mr Mnuchin said.

Yet the bilateral economic relationship between the US and China is still highly stressed. Even though the business community cheered the pause in the trade war, there are still US levies on $360bn of goods, with less than one-third of them benefiting from tariff reduction under the agreement.

The US has not retreated from any of its export control measures targeting Chinese companies such as Huawei, and China has not backed away from scripting a controversial list of “unreliable entities” that could threaten some American companies.

Although Trump administration officials will claim that they have already achieved more with China on trade than previous administrations, the question is whether the limited and thus far vague results have been worth the commercial disruption inflicted.

“The costs have been substantial and far reaching, the benefits narrow and ephemeral,” wrote Scott Kennedy, senior adviser in Chinese business and economics at the Center for Strategic and International Studies.

Additional reporting by Sun Yu in Beijing

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