Quick Take: A Phase One Trade Deal - At Long Last

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• China and the United States announce a phase one trade deal (at long last) but details will not be available for a few weeks.
• President Trump tweeted the announcement within an hour of the House Committee vote to impeach.
• The Chinese government scooped the Administration in making the announcement.

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Phase One Trade Deal Announced

The long expected trade deal was announced this morning, but the details still have not been released. Based on meetings with the Administration and the Chinese, press reports, and public statements, we gather that the agreement is expected to cover a broad range of issues from additional purchases, intellectual property rights protection and technology transfers to dispute resolution.

Details are slim, but here is what we have learned:

• Purchases: The Chinese committed to make additional agricultural, energy, manufactured goods and other purchases as part of the effort to reduce the trade deficit. On agriculture, China committed to purchase additional soybeans, wheat, corn, and rice. China has said that these purchases would be “significant”; Trump tweeted that China would be buying $50 billion in agricultural products alone.

• Financial Services: China announced that it would open the market further for banking, securities firms, mutual funds, insurance, and futures trading. While this is in the agreement, China already announced earlier this year its intention to start taking these actions as of January 2020.

• Intellectual Property Rights: Last month, China issued a directive from its State Council that it would take a two-pronged approach: lower the threshold for abusers and increase the penalties for those caught infringing. They have also made it a priority for governors and mayors, who have received briefings on how to crack down on violations.

• Technology Transfer: China committed to eliminate forced tech transfer as a condition for establishment and has announced that requirement of this action by officials will be considered a criminal offense.

• Currency: An agreement on exchange rates has been wrapped into this deal, which is unusual for a trade agreement.

• Enforcement: This is the quintessential ingredient for the success of any agreement and has been one of the hold ups of the negotiations. China and the U.S. have stated that they will dedicate staff to focus on the enforcement of the agreement. And the U.S. will maintain the 25 percent tariff that has been placed on $250 billion of Chinese products. Trump says that this will provide leverage for negotiations towards the phase two agreement.

The Bottom Line

These are all important concessions, but generally represent actions that China intended to take independently of the 301 investigation. The U.S. can take credit for speeding up the timetable of some of these steps, however.


What Is Noteworthy?

It is no surprise that President Trump chose this morning to announce the new trade deal with China. He made it public within an hour of the House Judiciary Committee’s vote to impeach him.

On China’s part, however, the government held a press conference in Beijing timed one hour before the U.S. announcement to share the contours of the agreement. The event was led by the three main Vice Ministers negotiating at the staff level for China: Vice Minister of Finance, Liao Min; Vice Minister of Commerce, Wang Shouwen; and, Vice Minister of Foreign Affairs, Zheng Zeguang.

Ironically, President Trump tweeted that the Wall Street Journal published a FAKE NEWS story when it reported on China's press conference. A mere one hour later his tweet announcing the agreement was sent.


Phase Two

President Trump announced that negotiations would start immediately for phase two of this agreement. The good news is that the issues are clear for the next phase of discussions, and many of them have been under negotiation for the past two years. The challenge is that they are the more difficult issues to address such as state-owned enterprise reform and further market opening. It will be highly unlikely that the Administration will have a second agreement before the 2020 presidential election, especially as “negotiating fatigue” has settled in after two years of sometimes intense discussions.

That said, to create incentive for this next round, the Administration will cancel the round of tariffs that were due to go into effect on December 15 and will reduce the tariff on $120 billion of products announced in September to 7.5 percent from 15 percent. The U.S. will maintain the 25 percent tariff that has been placed on $250 billion of Chinese products. China has agreed to suspend retaliatory tariffs due to take effect later this week.

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