After a year and a half of tit-for-tat tariffs and tensions, the United States and China yesterday signed a ‘phase one’ trade deal.

Both sides were keen to play up the importance of the agreement, with China’s The Global Times saying in an editorial that “the hard-fought agreement should be cherished by both sides”, and US President Donald Trump heralding the pact as “the biggest deal anybody has ever seen”. However, experts were less impressed.

Going section by section, GTR outlines the parts of note.

The 96-page document includes sections on intellectual property, technology transfer, trade in food and agricultural products, financial services, macroeconomic policies and exchange rates, and the expansion of trade between the two parties, as well as annexes on dispute resolution. But the deal is “noticeable for what it doesn’t say rather than what it does say”, says Rebecca Harding, independent economist and CEO of Coriolis Technologies.

Kerstin Braun, president of trade finance provider Stenn Group, agrees: “While it’s a start, the deal fails to cover the significant issues that prompted the war in the first place. This includes China’s preferential support of state-owned enterprises and technology transfer from American companies doing business there.”

Intellectual property

In this chapter’s preamble, the document says: “The United States recognises the importance of intellectual property protection. China recognises the importance of establishing and implementing a comprehensive legal system of intellectual property protection and enforcement as it transforms from a major intellectual property consumer to a major intellectual property producer. China believes that enhancing intellectual property protection and enforcement is in the interest of building an innovative country, growing innovation-driven enterprises, and promoting high quality economic growth.”

This section includes several commitments by China, such as the prohibition of unauthorised disclosure of undisclosed information, trade secrets, or confidential business information by government personnel or third-party experts in criminal, civil, administrative, or regulatory proceedings. China also provides that e-commerce platforms “may have” their operating licenses revoked for repeated failures to curb the sale of counterfeit or pirated goods. The Trump Administration will likely point to this as a win, given that for each article the US side has made no commitments, instead writing that it “affirms that existing US measures afford treatment equivalent to that provided for in this article”.

“For now, phase one doesn’t strike a deal in a comprehensive way,” says Anahita Thoms, head of the trade practice at Baker McKenzie in Germany. “In the beginning, the goal was about securing IP rights, easing the issues around forced technology transfer, market access and subsidies. In regards to phase one,  we are not there yet. Many, before President Trump, have tried to reach such a comprehensive deal, but it remains elusive for now.”

Technology transfer

Forced technology transfer from US firms to China has long been a particular bugbear for Washington. “Chinese companies utilise a variety of methods – many of them covert or coercive – to acquire valuable technology and knowhow from US firms. These efforts are often made at the direction of and with assistance from the Chinese government, part of Beijing’s larger effort to develop its domestic market and become a global leader in a wide range of technologies,” said the US-China economic and security review commission in a report early last year.

The wording of this section appears to tackle this: “Any transfer or licensing of technology between persons of a party and those of the other party must be based on market terms that are voluntary and reflect mutual agreement.” However, how enforceable this will be remains to be seen.

“This will play out in the tech and fintech world,” says Harding. “Where China has been relying on integration into global tech systems it is now going it alone. The deal, and the accompanying ‘behind the scenes’ sanctions against Huawei and potentially against businesses using US tech in China mean that China now has no option but to develop its own systems. This will accelerate divergence and decoupling.”

Trade in food and agricultural products

The agreement provides for the initiation of bilateral technical discussions to review the current US ban on Chinese dairy products. Currently, the US Food and Drug Administration detains without physical examination all milk products, milk derived ingredients, and finished food products containing milk from China. The extent to which any lifting of this ban will move the trade needle is negligible: according to data from Coriolis Technologies, China exported just US$270mn in dairy produce in 2018, with the vast majority going to Hong Kong. Indeed, the Asian giant remains overwhelmingly a net importer of dairy, with imports reaching US$6.49bn in 2018, according to Coriolis data.

On the other side, China has agreed to remove non-tariff barriers on infant formula and extended shelf-life milk from the US, a move lauded by the Washington DC-based International Dairy Foods Association. “Over the next decade, China represents a US$23bn market opportunity for US dairy, and it is essential to our producers and companies that we have a trade relationship with China that further levels the playing field for American dairy and provides expanded market access for our growing industry,” says Michael Dykes, CEO of the association, who calls the concession “important”. Tom Vilsack, president of the US Dairy Export Council (USDEC), adds: “These are important deliverables that USDEC has been pressing China for over the course of the last few years.”

However, there is no commitment in the agreement to lift Chinese tariffs on US dairy, which it put in place in September last year as a retaliation to the Trump administration’s plans to place 10% duties on a further US$200bn of Chinese goods. In a statement, Randy Mooney, chairman of the National Milk Producers Federation, says: “We appreciate the hard work invested by both the US and Chinese governments, but we urge China to swiftly lift all retaliatory tariffs against US dairy products and work with US suppliers to fulfil their purchasing commitment.”

The feeling among onlookers is that any substantial changes to US-China trade policies are being kicked down the road somewhat.

“Interestingly, the deal doesn’t cover many non-tariff barriers, including industrial subsidies to Chinese state-owned enterprises, procurement rules, and product standards. These will likely be addressed in a desired phase-two deal after the US presidential elections,” says Gregory Daco, chief US economist at Oxford Economics.

Financial services

The deal provides for a very limited opening-up of the Chinese market to US financial services providers, with China agreeing to remove its foreign equity cap in insurance, securities and fund management, allowing wholly US-owned services suppliers to participate in these sectors.

China also agreed to accept applications from US electronic payment services suppliers, such as Mastercard, Visa or American Express.

Macroeconomic policies and exchange rates

The US treasury department dropped its “currency manipulator” label on China ahead of the signing of the deal, and the text of the agreement further confirms that both sides have agreed to recognise the International Monetary Fund (IMF) articles of agreement to “avoid manipulating exchange rates or the international monetary system in order to prevent effective balance of payments adjustment or to gain an unfair competitive advantage”.

Expanding trade

This section is arguably the most interesting. It includes a commitment by China to “ensure that purchases and imports into China from the United States of manufactured goods, agricultural goods, energy products, and services exceed the corresponding 2017 baseline amount by no less than US$200bn”.

Given 2017 imports of US goods and services by China totalled US$186bn, this would represent an unprecedented acceleration of trade between the two parties – and one which seems unrealistic at best. “This would represent more than a doubling of US exports to China, which could pose a difficult threshold to achieve without trade diversion,” says Oxford Economics’ Daco. “China has long stated it wants its imports to reflect final domestic demand, while US exporters would struggle to meet those ambitious targets.”

A closer look at the figures involved reveals just how ambitious these targets are.

For manufactured goods, the deal pushes China to purchase and import “no less than US$32.9bn above the corresponding 2017 baseline amount” in 2020, and “no less than US$44.8bn above the corresponding 2017 baseline amount” in 2021. China will also promise to buy a further US$52.4bn worth of energy, US$32bn of agriculture and US$37.9bn in services.

Dispute resolution

The trade agreement notes that if a dispute arises, it will be settled without a third party, by filing complaints to the newly-created Bilateral Evaluation and Dispute Resolution Office.

If the Bilateral Evaluation and Dispute Resolution Office, led by the US Trade Representative and the Vice Premier of the People’s Republic of China, cannot resolve the complaint, the complaining country will have the right to issue a response for damages or losses.

“With a weakened World Trade Organisation and the general trend away from multilateral trade agreements, we’re only going to see more trade squabbles,” says Stenn Group’s Braun.

A political win, but not a win for trade

Overall, the text of the deal is clearly angled towards calming the troubled waters of the relationship between Beijing and Washington, but it lacks key commitments around key areas such as tariffs and technology.

“This so-called phase one deal is a truce between the world’s two largest economies. However, it will not resolve many of their disagreements,” says Baker McKenzie’s Thoms. “Trade deals are about compromise and it is inevitable that both countries will not be entirely happy with the deal. For example, the US wanted to have comprehensive structural reform, and phase one is certainly not that. Similarly, China would have preferred to have no tariffs at all. Phase two, and maybe phase three and four will have to follow.”

The fragile truce brought by the agreement, however, should prevent a further worsening of China-US tensions ahead of the 2020 presidential elections, although any broken promises by either side could easily lead to a re-escalation.