A preliminary trade deal signed by the United States and China on Wednesday may help to calm tensions from an 18-month dispute, but the agreement, which does not yet resolve the most important points of contention, may not be as effective as expected, analysts have warned.
Signed with much fanfare at the White House, the “Phase 1” agreement offers the U.S. some guarantee on China’s practices related to the treatment of intellectual property, the opening of its markets to American financial services firms, and the purchase of more U.S.-made goods and services, particularly agricultural products.
The deal has been praised especially because it reduces trade frictions between both major economies, who have experienced considerable economic pain in the trade war that has seen tariffs placed on hundreds of billions of dollars’ worth of goods. It also eases fears of further escalations that could drag down the global economy this year. But it fails to address several major challenges, which are expected to be ironed out in a “Phase 2” negotiation that experts say will be far more difficult to complete successfully.
For one, the agreement leaves in place 25 percent tariffs on $250 billion worth of Chinese industrial goods and components used by U.S. manufacturers, and China’s retaliatory tariffs on over $100 billion in American goods, leaving U.S. businesses and consumers to bear the costs. According to reports, tariffs on Chinese imports have cost U.S. companies $46 billion, raising their input costs and making them less competitive. Among manufacturers, the higher import costs and China’s retaliation have also led to employment losses, the BBC reported, citing the U.S. Federal Reserve. Since 2018, tariff-related uncertainty and costs have cut 0.3 percent off of U.S. economic growth, while reducing household income by an average of $580, estimates by the Congressional Budget Office shows.
It also does not cover other major points of concern such as cyber theft by China, Beijing’s industrial policy that subsidizes domestic companies to make them more competitive internationally as well as its barriers against some U.S. technology investments. The absence of any provision on China’s industrial subsidies leaves “a big, giant, gaping hole that has not been addressed,” said Chad Bown, a trade expert with the Peterson Institute for International Economics.
To some, the commitments contained in the agreement does not offer anything new. They only echo previous pledges made by China at global trade summits and repackage steps Beijing had already been taking towards achieving more open markets. Elements of the deal also effectively take the relationship between the two countries back to where it was before Trump came into power. “A huge amount of this is a reset,” added Bown. “A lot of these elements are locking in things that were already there, or already in train before.”
Analysts are also concerned about the hard-to-achieve purchase targets for China. As part of the deal, Beijing pledged to buy at least $200 billion worth of U.S. farm products as well as other goods and services over two years, a higher amount than the 2017 baseline of $186 billion in purchases, before the U.S. began imposing punitive tariffs.
“It looks to me (like) a very big concession on China’s side. I don’t see how China can fulfill its commitments without increasing subsidies to domestic producers,” Dan Wang, an analyst at The Economist Intelligence Unit (EIU), told Al Jazeera.
China’s Vice Premier Liu He, who led Beijing’s negotiations with the U.S. and signed the deal with President Donald Trump, said Chinese companies would buy $40 billion in U.S. agricultural products annually over the next two years “based on market conditions.” Washington will reportedly monitor the purchases so China will have to make sure that “nothing with tariffs or non-tariff barriers prevent that from happening,” the official said.
So far, the effect of the planned purchases on business has been pain, the BBC said. Soybean features slid on Wednesday, indicating uncertainty about the purchase goals. And farmers who have been targeted by China’s tariffs have seen bankruptcies soar, prompting a $28 billion federal bailout. Domestic producers in China meanwhile will “suffer a lot,” Wang said, noting that the deal means “direct competition for Chinese farmers, who are mostly small-scale and not competitive in this field.”
Other exporters of goods and services to China such as Brazil are likely to suffer as well under the initial trade deal as China will reduce its purchase of goods from other countries, said Yun Jiang, co-editor of China Neican.
Moreover, some countries are worried that the $200 billion Chinese purchases of U.S. goods, which is to be monitored by the U.S., will lead to a sort of controlled trade between the world’s two largest economies, which could possibly disrupt market forces, discriminate against their companies and violate commitments to the World Trade Organization (WTO).
Generally, the move by the U.S. and China to reduce the tension has been welcomed by countries, most trade experts and representatives of the business community, even as they caution that it is unlikely the deal will produce gains sufficient to outweigh the losses suffered so far and there is even no assurance that the détente will hold.
While many observers are cautious about the outcome of the agreement, limited in scope than the comprehensive deal much of the international community expected, staunch critics hold that the scale of China’s concessions has not been worth the pain and disruption caused by the trade war.
Regardless, the signing of the deal represents “the start of a new chapter” but “significant work remains to address longstanding, structural issues in the commercial and economic relationship,” the American Chamber of Commerce in China said. “We commend both governments for staying the course and taking this important step to rebuild trust and restore some stability in the world’s most important commercial relationship,” Thomas J. Donohue, CEO of the U.S. Chamber, said in a statement, adding that the deal provides much-needed certainty to businesses as they begin the new year.