US-China trade rapprochement round one

Asia World

Author: Yao Yang, Peking University

The conclusion of phase one of the trade negotiations between the United States and China has been  welcomed by global markets because it has brushed off many uncertainties caused by the tense relationship between the world’s two largest economies over the past two years.

US President Donald Trump stands Chinese Vice Premier Liu He after signing 'phase one' of the US-China trade agreement in the East Room of the White House in Washington, US, 15 January 2020 (Photo: Reuters/Kevin Lamarque).

US President Donald Trump stands Chinese Vice Premier Liu He after signing 'phase one' of the US-China trade agreement in the East Room of the White House in Washington, US, 15 January 2020 (Photo: Reuters/Kevin Lamarque).

According to the now publicised text, the deal is a more or less one-sided agreement targeting China. Over the next two years, China will need to increase imports from the United States by US$200 billion. China also needs to take steps to further open its markets, strengthen intellectual property rights protection, get rid of forced technological transfers and increase the transparency of its exchange rate policy.

In return, the United States will cut half the tariffs it imposed in 2019, while keeping the 2018 tariffs intact. This is sufficient for President Trump to claim victory in the trade war. Equivalent to 1 per cent of US GDP, the US$200 billion increase in exports to China will certainly boost his chances of re-election.

Despite its one-sided nature, the phase one agreement is not all bad for China. For one thing, China has geared up on policy reform. It has adopted a new law for liberalising foreign direct investment, banning forced technological transfers and allowing wholly foreign-owned financial institutions to operate in the country.

And the US$200 billion increase in purchases is not necessarily bad for China. Purchasing more US goods will deepen economic ties between the two countries. US voices calling for decoupling with China are growing louder. But the new purchases will strengthen integration in two ways. One obvious way is through the purchases themselves. If the target is reached, China’s imports from the United States will almost double, and if China’s exports to the United States stay the same, the US trade deficit with China will be eliminated.

The second way lies in how the purchase agreement is going to be fulfilled. While China can find ways to increase its imports from the United States — including diverting some imports from other countries — there is a question about how the United States can increase its supply of US$200 billion exports in such a short period of time. The US economy is now in full employment; except in agriculture, there is not much slack in the economy.

One possible remedy is to allow Chinese companies to invest in the United States’ production capacity. For example, liquefied natural gas (LNG) could contribute a large share to new exports, but there are insufficient LNG pipelines and port terminals in the United States. If Chinese companies are allowed to invest in those facilities, US LNG exports to China will be expedited. As a result, the two countries will be even more deeply integrated.

Importing more US products is also good for the welfare of Chinese people. High tariffs have created a large wedge between consumer prices in China and those in the United States. In addition, to fulfill China’s commitment to cutting carbon emissions, and also to increase people’s living standards, China has to cut the share of coal in its energy mix and increase clean energy sources, including natural gas. Importing more gas from the United States will help fulfil that goal.

The conclusion of the phase one agreement shows that the United States has not ‘given up’ on China. Despite some hysteric panic about China, mainstream US politics still favours maintaining normal, if not deeper economic relations with China. After two years of strife, the two countries now enter a new phase of rapprochement.

Last October, 37 scholars from China, the United States and other countries signed a joint statement calling for a pragmatic approach to settle the US–China trade dispute. The starting point was that both countries should leave room for each other to conduct domestic policy to address domestic concerns, as well as respond to the external spillovers of each other’s domestic policies. Beggar-thy-neighbour policies should be corrected, and domestic policies with spillover effects should be negotiated. If negotiation fails, the negatively affected party can use domestic policy to safeguard its interests.

Dividing the negotiations into phases is consistent with this idea. The first phase dealt with issues concerning cross-border trade and investment. The second phase will deal with structural issues, particularly subsidies and state-owned enterprises in China, and restrictions on technological transfers in the United States.

The World Trade Organization (WTO) also needs reform to accommodate the shocks caused by China’s rise. The two countries should treat this phase as an opportunity to shape rules that the WTO can use as templates for reform. China, in particular, has to change its mindset and realise that it is no longer a newcomer, tolerated by the international community as it exploits its own interests. It is now time for China to take responsibility as one of the rule-makers and help set rules for a post-globalisation world.

Yao Yang is Dean of the National School of Development and Director of the China Center for Economic Research, Peking University.

Please follow and like us: