The U.S.-China Mini Deal (That Never Was?)
Q1: What did the United States and China agree upon?
A1: On October 11, President Trump announced that the United States and China reached a limited trade deal after more than a year of unrelenting trade tensions between the two economic powers. However, after the announcement, it became clear that more work on the so-called phase one agreement is required. The United States and China are set to hold additional negotiations culminating in a meeting between President Trump and Chinese president Xi Jinping at the Asia-Pacific Economic Cooperation (APEC) leaders summit in Chile set for November 16 and 17 where the limited deal would be signed.
The president has described the pact as a “substantial phase one” agreement whereby the United States agreed to halt tariffs hikes on $250 billion of Chinese imports scheduled for October 15, although it will not scale back those tariffs from their current 25 percent rate. In exchange, the Chinese have agreed to increase agricultural purchases from the United States, a relief to U.S. farmers hit hard by the trade war, especially soybean and corn growers. It is not clear what amount of agricultural products China will purchase as Beijing has reportedly tied purchases to a rollback of U.S. tariffs. Regardless, futures for both crops climbed in anticipation of the agreement on Friday, as did the broader stock market. Some reports claim that the interim deal will include provisions on intellectual property and currency management as well. There was no agreement on a further round of U.S. tariffs set to take affect on December 15, which Treasury Secretary Stephen Mnuchin has said will come into force if a deal is not finalized and signed at APEC. While the written text of the deal will likely not be finalized for several weeks, the announcement cools tensions momentarily, reducing uncertainty that had been suppressing economic activity for months.
Q2: How did we get here?
A2: The U.S.-China trade war has raged since March 2018, when President Trump slapped new tariffs on more than $50 billion of Chinese goods. Since then, the trade war has expanded to cover more than $360 billion of Chinese imports, covering nearly 65 percent of the total import volume in 2018. Critics have disapproved again and again of Trump’s unilateral tariff measures, arguing that a multilateral approach is the only way out of a downward spiral in U.S.-China relations and the liberal trade order overall. Even members of the president’s own party complain about the hostilities and tariffs affecting their constituents, although vocal dissent has been rare.
This most recent round of trade talks was the thirteenth time Secretary Mnuchin and Vice Premier Liu He met to try to defuse tensions. The agreement came after a week when the director of the International Monetary Fund projected $700 billion of yearly losses due to the trade war, or 0.8 percent of global GDP, and when reports swirled that a pessimistic Chinese delegation would leave Washington earlier than scheduled without a deal in hand. As the United States blacklisted eight Chinese tech companies for human rights violations, China swung back, barring “anti-China” U.S. citizens from receiving visas. Despite recent tit-for-tats, President Trump, coming off a successful accord with Japan earlier this month, was likely eager to announce an agreement to calm the business environment.
Q3: What comes next?
A3: Unfortunately, this détente is likely temporary. The compact elides far more issues than it addresses. To reach a comprehensive trade deal, the United States and China will have to consider scaling back the bilateral tariffs that have already been put in place as well as limits on investment, forced technology transfer, and perhaps address human rights and national security concerns that have been thrown into the mix via U.S. export controls and other restrictions. The White House has been exploring additional non-tariff options to pressure China and limit U.S. economic interaction with Beijing, such as limiting Chinese enterprise investment in the United States and exposure of U.S. financial assets to Chinese stocks. Moving forward with either of those options would rock trade negotiations. In the near-term, the announcement of a deal gives President Trump a short-term win and will briefly buoy the stock market, but without substantive structural changes to the U.S.-China relationship, choppy waters lie ahead.
Some express skepticism that this handshake deal will ever be signed. Chinese officials seek further meetings to hammer out the details of the deal ahead of the APEC summit. Although the Chinese Ministry of Foreign Affairs declares that the two sides are “on the same page,” many sticking points remain. For example, China requested a cancellation of U.S. tariffs on $160 billion of consumer imports planned for December, in addition to canceling the October 15 round, a move that the U.S. side has not proposed. Even Secretary Mnuchin conceded on Monday that “a few words need to be agreed upon” in terms of enforcement and specific agricultural purchases. It is clear that Chinese demands for further tariff relief will not go away; it is less clear whether the United States will budge on its long-term position for the sake of a very limited deal.
Jack Caporal is an associate fellow with the Scholl Chair in International Business at the Center for Strategic and International Studies (CSIS) in Washington, D.C. Jonathan Lesh is an intern with the CSIS Scholl Chair in International Business.
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