China views trade deal as welcome respite in US battle

When US trade negotiators arrived in Beijing in May 2018 for their first round of talks with vice-premier Liu He, they presented him with a strongly worded list of demands outlining their objectives.

Chinese officials thought the tone of the complaint was insulting and would garner them sympathy at home and internationally, according to people involved in the discussions. So they leaked it to a Chinese journalist and it went viral. “We couldn’t believe how fast it got out,” one US official said. 

The document remains the best benchmark with which to measure the two sides’ “phase one” trade agreement against Donald Trump’s original aspirations for the talks — and an indication of how far the deal is from the US president’s stated ambitions.

The document began by demanding a $200bn reduction in the US trade deficit by the end of this year, compared with 2018. According to the Office of the US Trade Representative, the US had a trade deficit with China of $378.2bn in 2018. Steven Mnuchin, Treasury secretary, subsequently told US embassy staff in Beijing that deficit reduction would ultimately determine whether the negotiations had been a success, according to people briefed on his meetings in the Chinese capital. 

But the strongest language called for an end to Beijing’s “market-distorting subsidies and other types of government support”, as well as what the US characterised as “Chinese government-conducted, sponsored and tolerated cyber theft”. 

After almost two years of negotiations, tariffs and counter-tariffs, Mr Trump has achieved none of these objectives.

Instead of a $200bn reduction in Washington’s trade deficit with China, the agreement calls for $200bn-worth of additional Chinese purchases of US commodities, manufactured goods and services over the next two years, compared with 2017 levels. 

Chinese subsidies and alleged cyber theft were not addressed in Wednesday’s agreement, with US officials instead promising to tackle these in “phase two” talks that will begin later this year. Robert Lighthizer, the US trade representative, said the critical challenges that remained included “industrial subsidies ” and “cyber intrusions in the commercial sphere”.

Chinese officials and state media said Beijing’s immediate focus would be on implementing the phase one deal rather than an ambitious second round of negotiations. They have also been careful not to celebrate this week’s agreement too much, calling it a welcome respite from more tariffs and “just the first round” of negotiations. 

In the interim, most of the tariffs imposed over the past two years remain, meaning both countries’ exports face an average 20 per cent tariff in the other’s market. Mr Lighthizer suggested China would use temporary tariff “exclusions” to meet its purchasing targets.

“There are still a lot of tariffs in place,” said Myron Brilliant, head of the US Chamber of Commerce’s international operations, at a briefing in Beijing this week. “That’s still leverage in the mind of the US government . . . but we want [both governments] to deal with the core issues that largely have not been dealt with in phase one and we want to see ultimately the removal of tariffs that we think are harmful to both economies.”

Many analysts doubt, for example, whether China can force domestic food companies — many of which are privately owned — to deliver the promised $37bn-worth of US agricultural purchases this year. 

“What remains unclear is how China will reconcile its commitment to expand purchases of American agricultural products with agreements it has made with other nations,” said Ker Gibbs, president of the American Chamber of Commerce in Shanghai. “We need more details on Chinese agricultural purchases to see if the numbers are realistic.”

In order to reach that target, China would need to increase its purchases of US nuts to $2.5bn in 2020, compared with a record $390m in 2012, according to Chinese agricultural consultancy JCI.

After the outlines of the agreement were published by the USTR last month, Three Squirrels, one of China’s biggest snack food companies, said it was “difficult to say” if it could boost US purchases due to uncertainty over tariffs. 

Companies that import pistachios and almonds have already adjusted their purchases away from the US. Shanghai Laiyifen, China’s biggest snack food maker, said it was easier to import from countries such as Australia and New Zealand that have free trade agreements with Beijing.

Almost all other Chinese concessions outlined in this week’s agreement were either already in train or viewed by President Xi Jinping’s administration as beneficial to China’s own economic development. These include increased protections for intellectual property and proprietary technologies, greater market access for US financial services companies and a longstanding pledge by Beijing to ensure the renminbi is fairly valued against the dollar.

Over the past decade, China has gradually strengthened enforcement of intellectual property rules and increased punishments for violation, largely out of self-interest as domestic companies become more dependent on income from patents and trademarks.

“These changes were in play before the trade war was launched, but had since been delayed,” Mark Cohen, an expert on Chinese property law at New York’s Fordham University’s law school, wrote in a recent note. “After much pain and drama, the [Trump] administration may yet be placing old wine in a new bottles.” 

Chinese courts have also delayed hearings on IP cases involving foreign companies since the onset of the trade war, according to multiple lawyers. Court officials, they said, were nervous to make judgments that might attract media attention or conflict with Beijing’s negotiating stance. 

“We see courts halting cases to see where the negotiations will go without any judgment or hearings,” said a Beijing-based IP lawyer. 

As such, companies are hoping that the phase one deal results in a return to business as it was before the onset of trade hostilities.

“Hopefully Chinese courts will begin to move the cases again after the signing,” said a Shanghai-based IP lawyer. 

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