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Phase One is window dressing, the US-China trade war is just on pause

It has taken a month of negotiations, but Phase One of the US-Chinese trade deal has finally been signed. However, this was the easy part.

Jamie Davies

January 16, 2020

5 Min Read
Tense relations between United States and China. Concept of conflict and stress

It has taken a month of negotiations, but Phase One of the US-Chinese trade deal has finally been signed. However, this was the easy part.

With eight chapters, 96 pages and a relatively redundant preamble, this is a document which President Trump can hold aloft and distract the world from the damning impeachment trial. To some, this is more progress than any President has made before, to others, little has been achieved through the first phase.

Both are probably correct.

Trump’s diplomacy and negotiating skills might not be orthodox, but he has brought stubborn leaders to the table. However, this is a man who has also aggravated and irritated almost every politician around the world.

“Today, we take a momentous step – one that has never been taken before with China – toward a future of fair and reciprocal trade, as we sign phase one of the historic trade deal between the United States and China,” Trump said at the signing ceremony.

“Together, we are righting the wrongs of the past and delivering a future of economic justice and security for American workers, farmers, and families.”

The Phase One document on show here contains some quick wins and some useful steps forward. However, it does appear to be an agricultural purchase agreement with a few bells and whistles attached. It should also be worth noting that President Xi Jinping was not in the White House to sign the deal, that responsibility was left to Chief Negotiator Liu He.

The document addresses industries and issues which are not at the crux of the argument between the two superpowers. China has promised to beef up intellectual property protections, lower barriers to entry for US firms, US farmers get help and the financial services markets will be opened-up.

It is meaningful because it is progress, but it is meaningless because it hasn’t addressed the root cause of the conflict which has caused so much collateral damage.

And as you would imagine, the President’s opponents are not in agreement with the success of this deal.

“I greatly fear President Xi is laughing at us behind our backs for having given away so little at the expense of American workers, farmers and business,” said Chuck Schumer, Minority Leader of the United States Senate.

“The administration, in an attempt to get a deal before the 2020 election, has thrown the American people and business overboard. They are going to be the ones left to face the consequences.”

Next, President Trump and President Xi will have to address new areas which could cause some pretty significant friction. Next the duo will have to come to an agreement on cybersecurity, state-owned enterprises, joint ventures between Chinese and foreign companies. There are a host of complications between the two nations who have not been addressed today, not least to mention to relationship between the Chinese Government, its intelligence agencies and technology companies. There could be some heated debates between the two incredibly stubborn nations over these topics.

“At first glance, it is a bit ‘meh’ from a telecoms and technology perspective,” said Dean Bubley of Disruptive Analysis.

“It’s unsurprising there has not been a reference to Huawei. Despite all the press focus on ‘spying’ and 5G, it is all about the perceived risk of automation, network orchestration and software upgrades. These areas are very difficult to verify as safe.”

Bubley also highlighted some of the tariffs have been addressed, though these are largely the ones focused on consumer devices. The broader tariffs, targeted at aspects of the IOT and computing segments will have to be addressed in Phase Two.

This is certainly a step in the right direction, but let’s not forget a few things:

  • Huawei is still on the US Entity List

  • The US Government is still pressurising other nations to ban Chinese suppliers

  • The tariffs remain in place

  • This agreement will only last for two years

  • The timeline for Phase Two and beyond has not been detailed

The trade war is still currently raging on between the two, and it is debatable as to whether there has been any material benefit to the US.

As part of this deal, China has agreed to purchase $200 billion of agricultural goods over the next two years, does this make up for the $420 billion loss in US exports since the beginning of the saga?

Huawei has continued to grow its revenues through this period, 2019 sales are expected to be up 18% year-on-year, though General Motors reported a 15% decline in Chinese sales. This is a single example, though there are numerous others of US companies being negatively impacted by the trade war. IHS Markit expects real US imports to fall 4.5% below the baseline level in 2020 as a result, while China’s will drop 3.2%.

Optimists will hope these negative impacts will be reversed once the trade war concludes, but that might not be the case; the US is forcing China to reassess its reliance on other nations for key industries and supply chains.

Reports in the Chinese press suggest the Government is driving towards the creation of 25 new manufacturing innovation centres, adding to the 15 which already existed at the end of 2019. Domestic capabilities can only provide 33% of China’s key components today, though the plan is to shift this up to 75% by 2025.

How much of this drive towards creating domestic supply chains is down to the trade war is anyone’s best guess. The ‘Made in China 2025’ industry strategy existed before the trade war, though the conflict might have exposed weaknesses the Government now wants to address. It might be the case that the US caught the Chinese off-guard and a newly invigorated drive towards self-reliance will make it stronger than ever, assuming it can meet these goals of course.

That said, the announcement is encouraging, and Trump has arguably got more from the Chinese Government than any politician before him, irrelevant of nationality. But some of the biggest questions are still on the table. If it took a month to achieve Phase One of a deal which hasn’t got many commentators enthusiastic, how long will it take to secure signatures on the phase where the sensitive and critical conversations will take place.

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