US-China Phase 1 Deal: A Temporary Ceasefire

Behind the numbers

The Phase 1 trade agreement between the US and China consists of 9 chapters, covering many areas such as intellectual property rights, technology transfer, access to financial and service markets, exchange rates, transparency and dispute resolution. Most notably, the US side canceled the plan to impose tariffs on 160 billion USD worth of Chinese consumer goods that were scheduled to be applied on December 15, 2019, and at the same time halved the tariff rate from 15% to 7.5% on 120 billion USD worth of Chinese goods that had been taxed since September 1, 2019. The US side also pledged not to impose any new tariffs in the future while the two sides continue to negotiate for the next stages. In return, China will also lower tariffs on 850 products ranging from frozen pork, avocado, to some semiconductors, and commit to importing at least $200 billion more in US goods over the next two years.

A temporary truce between the two giants. Photo: AP

Although China is a developing country with large production capacity and exports goods around the world, it still needs to import animal feed, energy and high-tech products. This is the "room" for the US to trust the 200 billion USD figure that China committed. It is expected that China will import from the US about 75 billion USD of manufactured goods, 50 billion USD of energy, 40 billion USD of agricultural products and 35 billion USD of services. China also committed to ending the situation of forcing or pressuring foreign companies to transfer technology to Chinese companies.

In addition to the terms that both sides agreed to publicly, the phase 1 agreement signed between the US and China also has a “secret annex” related to the goods and services that the two sides will buy from each other.

In addition to the obvious benefits shown through the numbers, the phase 1 agreement also has great political significance for both the US and China at this time. For the US, the phase 1 agreement relieves a lot of pressure on both the administration and US President Donald Trump personally. The agreement will help reduce the risk of a US economic downturn after a long period of high growth, and will be a catalyst for stability and even further increases in the Wall Street financial market. For President Donald Trump personally, signing this agreement will partly help reduce the pressure from the impeachment investigation being promoted by the Democratic Party and create a foothold for Donald Trump to continue to stay in the White House for another 4 years. Meanwhile, by announcing that tariffs on key Chinese imports will remain in place, the Trump administration will retain leverage to force China to comply with its commitments in the next stages of negotiations, affirming the value of the tariff tool that Trump once said he “loves.” On China’s side, the signing of the agreement with the US also relieves domestic and foreign pressure on the possibility of a slowdown in economic growth, which has been reflected in the 6% growth figure, the lowest in decades.

China pledges to import more US agricultural products. Photo: Financial Times

Start a new cycle

According to analysts, the phase 1 trade agreement is only a “temporary ceasefire” in the trade war that has been triggered since July 2018 between the US and China, and is not enough to maintain a long-term truce. Because, despite including many provisions in 9 chapters, the phase 1 agreement has not yet addressed the most fundamental issues. Tariffs can be an effective tool that both sides use to hurt each other, but are still considered “superficial” and do not get to the core of the problem.

Since launching the trade war against China, President Donald Trump has made it clear that his goal is to narrow the trade balance of more than $300 billion a year in favor of China. Meanwhile, there are still many doubts behind the $200 billion in goods that China pledged to buy more from the US over the next two years. First, China's commitment in the agreement is said to be quite vague, with no specific roadmap for specific products. China has announced tariff cuts on more than 850 imported products from the US, but these products may not coincide with the products that the Chinese economy needs. When supply and demand do not meet, the $200 billion figure is really too far away.

The new agreement cannot narrow the US-China trade balance. Photo: Forbes

Another reason for the low expectations of the US-China phase one trade deal is that the two sides have not gone into the technology sector, which is considered the core of the 18-month trade conflict. All the pressure that the US is creating on China's largest technology corporations such as Huawei, ZTE, and intellectual property issues are still almost intact even when the two sides announced the agreement. Just days before the official signing ceremony, US officials continued to pressure the British government to prevent Huawei from participating in the development of the 5G network in this country.

According to analysts, new technology is truly the biggest battlefield that neither side is willing to give up, because that is where it will be decided who will dominate the development of the high-tech sector globally in the next decade. This No. 1 position is of particular importance to whoever wins. Because in the future, the size of the world's No. 1 economy will depend on the ability to export high-value products in the fields of artificial intelligence and quantum computing. Not only that, the No. 1 position in technology is also related to ensuring national security and military operations. This is a particular concern for the US when China does not hide its ambition to compete in this field.

New technology is truly the biggest battlefield where neither side is willing to give in. Photo: Reuters

Therefore, after the phase 1 agreement is signed, the two sides will have to enter a "new spiral" with negotiations that are expected to be much more thorny. US President Donald Trump himself also admitted that a comprehensive trade agreement with China will need two or three phases, and negotiations for phase 2 will begin immediately after the signing of the phase 1 agreement. However, analysts say it is unlikely that the two sides will make any significant progress before the important election in November in the US.