The phase one trade deal between the U.S. and China signed in Washington on Wednesday is notable not for what it includes, but for what it omits, according to international trade experts.
“Phase one is not a trade agreement but just puts an end to costly escalation that was going nowhere,” said Peter Petri, a professor of international finance at the Brandeis International Business School.
The agreement focuses heavily on a commitment by China for purchases of $200 billion worth of U.S. farm products and other exports, with much less emphasis on the bigger issues standing between the two countries. The two sides also agreed to restart semi-annual meetings to discuss economic reform and dispute resolution.
In a highly unusual move, the administration did not make the actual agreement available ahead of the signing, as is customary — raising some skepticism about the enforcement mechanisms contained in the text. “I’m looking at the technology transfer and intellectual property provisions to see what the specific enforcement mechanisms are. My question is, how is this going to work?” said Dean A. Pinkert, senior counsel at the law firm of Hughes Hubbard & Reed and a former commissioner of the U.S. International Trade Commission.
“The two sides have reached a deal simply by avoiding the difficult issues like intellectual property protection in China,” said Mark Williams, chief Asia economist at Capital Economics. “China has no desire to change the way its economy operates.”
“It doesn’t so far include anything that is related to the entire issues surrounding Huawei, 5G, export controls, or a host of new technologies,” said Jacob Kirkegaard, a senior fellow at the Peterson Institute for International Economics. “More importantly, there is nothing here concerning Chinese subsidies and I think that, in many ways, is the big omission,” he said. “If you’re worried about China as a long-term tech competitor, then clearly the logic of that argument rests with the fact that the Chinese are quote-unquote rigging the system through state-owned subsidies.”
A joint statement issued by Secretary of the Treasury Steven Mnuchin and U.S. Trade Representative Robert Lighthizer said phase two of the deal has been pushed until after the U.S. presidential election in November, further prolonging an economic limbo that has put a chill on business investment and capital expenditures.
“Tariffs have been overwhelmingly bad for the United States. The uncertainty factor they’ve introduced has been extremely negative,” Kirkegaard said.
“A lot of the uncertainty that is plaguing businesses about their trade supply chains will continue after this deal,” Yerxa said.
“It seems from the public indications that there’s a lot of work to do on the structural reform items, so it’s going to take time,” Pinkert said. “We don’t really know what the timeline is for phase two.”
White House trade adviser Peter Navarro has not ruled out reimposing future trade sanctions, telling NPR the U.S. has the right to undertake a “proportionate response” to problems or disputes, and the vast majority of tariffs remain in place. Although the White House agreed to cancel a 15 percent tariff on a wide-ranging tranche of consumer goods that had been scheduled to go into effect last month, and tariffs were lowered on $120 billion worth of Chinese goods from 15 percent to 7.5 percent, the deal still leaves 25 percent tariffs on $250 billion of Chinese imports.
“If you’re an industry that’s in any sense dependent on international supply chains, many of your supply chains are probably going to still be subject to tariffs,” Kirkegaard said.
A recent National Bureau of Economic Research paper found a nearly complete pass-through of increased tariff costs, or a collective $51 billion borne by import buyers. Overall, the average tariff level on all Chinese imports only dropped by 2 percentage points, to 19 percent. (Prior to the start of the trade war, it was at 3 percent, according to the Peterson Institute.)
“There’s still a significant overall impact,” Pinkert said. “Nineteen percent is a sizable amount.”