As US President Donald Trump prepares to sign a phase one trade deal with China on Wednesday morning, trade experts see it as more of a political document than an economic road map with little chance it will inspire a meaningful phase two agreement any time soon.
But despite the scepticism, the accord hits the pause button on the turmoil, threats and mercurial negotiating that have characterised US-China trade relations over the past 18 months, they add.
As outlined, the deal promises to increase Chinese purchases of American goods and bolster intellectual property protection in return for lowered tariffs on Chinese goods entering the US.
“The president likes pomp and circumstance in cases where he has something to boast about and I think, from his standpoint, he has something to brag about,” said Derek Scissors, resident scholar at the conservative American Enterprise Institute, who was recently briefed on the trade deal by administration officials he declined to identify.
“He can say I’m the only one who can get China to the table, that I forced China into making concessions … and now the Dems can’t touch me on this,” he added, referring to the Democratic Party.
In a further sign of detente before the signing, the US Treasury Department on Monday removed China from a list of countries that it claims manipulate their currencies to gain an unfair trade advantage. The reversal drew criticism from some lawmakers.
“China is a currency manipulator – that is a fact,” Senate Minority Leader Chuck Schumer, a Democrat from New York, said in a tweet. “Unfortunately, President Trump would rather cave to President Xi than stay tough on China.”
Seen through the political lens Trump tends to favour, there’s little upside to further increasing or decreasing the pressure on Beijing near term as he juggles impeachment, a lingering Middle East crisis, efforts to pass a US-Canada-Mexico trade deal and his re-election campaign.
Declaring victory, signing a deal and moving on affords him several advantages, analysts said. It blunts criticism from political rivals that his trade policy has hurt average Americans, despite strong economic evidence that it does. It lets him argue that his China tariff strategy has worked. It throws a bone to long-suffering Midwestern farmers facing mounting bankruptcies and debt who are important to his re-election bid.
And it allows him to make the argument with manufacturing workers – a weak link politically as factory employment, new orders and inventory decline sharply – that he is a great deal maker who keeps his word and is in their corner.
Perhaps most important, the deal blunts potential economic damage that could unsettle financial markets moving toward November. Voters have short memories, and he wants to start racking up perceived wins they will remember as election day approaches.
That leaves Trump with neither the bandwidth, attention span nor willing partner to tackle a meaningful phase two agreement involving complex structural issues. These include reforming China’s state-led economy, prying open its services markets and tackling the myriad ways Beijing impedes foreign companies in its massive market.
“The phase one agreement will be the high-water mark for the Trump administration’s trade diplomacy vis-à-vis China during his first term, and perhaps for years afterward,” said Jeff Moon, president of the China Moon Strategies consultancy and a former official in the Office of the US Trade Representative and the National Security Council. “There will be discussions about a phase two agreement that will never be concluded.”
According to Moon, Trump uses a five-chapter playbook: take credit, exaggerate achievements, satisfy key stakeholders, divert attention and delay accountability.
Trump can also tout his continuing leverage over China. While the US has agreed to cancel tariffs on around US$155 billion in Chinese imports that were set for December 15 and halve to 7.5 per cent the September tariffs on about US$120 billion, it has retained 25 per cent tariffs on US$250 billion on Chinese imports.
That will allow Trump to reduce tariffs on Chinese goods close to the election – such a side deal has been rumoured – should the US economy or financial markets sink. Alternately, he can ratchet up the conflict, heaping blame on Beijing, if he needs to rile up his base.
China shares some of Trump’s short-term outlook but for very different reasons, analysts said.
Beijing is willing to purchase pork, soy and other US farm products it needs – although it may end up buying less than the US$40 billion to US$50 billion Trump has claimed – in order to stop further short-term US tariff increases. And even if Beijing falls well short of its commitment, the year-long purchase agreements will not wrap up before the spring of 2021, well after the election that is Trump’s inordinate focus, analysts add.
After walking away from talks in May, Beijing bit the bullet and agreed to sign the phase one deal driven by President Xi Jinping’s own political calculations, analysts said.
“China saw an off ramp and took it,” said Henrietta Treyz, economic policy director with consultancy Veda Partners and a former Senate staffer handling tax, banking and finance issues.
The trade war has fuelled corporate indecision and uncertainty, undercutting foreign investment. China’s economy is wobbly, with 2019 growth expected to barely reach 6 per cent when results are reported as early as Friday, the lower end of its target. And that’s only after a slew of rate cuts, tariff reductions and other year-end stimulus measures.
And 2020 is the final year of its 13th Five-Year Plan that promised to build a “moderately prosperous society” and end poverty, which is putting a spotlight on unemployment.
The Chinese have always been willing to write big checks to purchase American goods with the hope of preserving the overall status quo
Jeff Moon, former USTR official
Last week, the Standing Committee of the Communist Party's Politburo – described as the most powerful seven men in China – said every effort must be made to achieve the plan’s goals this year. Last month, the State Council, China’s cabinet, urged local governments to “go to all lengths” to prevent massive job losses it termed the country's top policy priority, citing the potential for social instability.
Also in December, Commerce Minister Zhong Shan told Chinese to prepare for a tough year ahead. “Use every penny on vital things,” he told top officials at a policy meeting.
In this environment, agreeing to more substantive concessions under a phase two deal offers little upside for Beijing, analysts said. Trump might not be re-elected. He is an unreliable negotiating partner. He could renege at any time. And his priorities – and trade team – might change completely in a second term without re-election pressure.
Beyond that, American moves to fundamentally alter China’s economic structure could weaken its grip on power and undercut a ruling Communist Party that has derived much of its legitimacy from expelling Japan and reasserting national pride.
“The Chinese have always been willing to write big checks to purchase American goods with the hope of preserving the overall status quo,” Moon said.
Amid the fanfare of Wednesday’s White House signing – involving 200 invited guests in the East Room – analysts question how much detail will be released. China is not eager to disclose terms that could make it look like it is caving in to US pressure, they said. And Trump wants to avoid quantifying a deal that may not be as “very large and comprehensive” as he has claimed.
The two sides will release “a lot of nothing”, especially involving politically sensitive agriculture purchases, predicted Treyz, who estimates the phase one deal secured only around 10 per cent of what the US originally sought.
“There’s also some concern that the final text will have weaker translation in the Chinese language than the US wants,” she added. “One obvious example is if it says ‘should’ in Chinese as opposed to ‘shall’ in English.”
Sign up now for our 50% early bird offer from SCMP Research: China AI Report. The all new SCMP China AI Report gives you exclusive first-hand insights and analysis into the latest industry developments, and actionable and objective intelligence about China AI that you should be equipped with.
More from South China Morning Post:
- Peter Navarro says phase one US-China trade deal will provide swift enforcement
- China says ‘trade war is not over yet’ ahead of phase one deal signing that is just the ‘first round of a game’
- Trade war deal: How Xi Jinping rejected Donald Trump’s signing ceremony proposal during turbulent period
This article Phase one trade deal gives Donald Trump bragging rights but phase two is likely a mirage, analysts say first appeared on South China Morning Post