Authors: Yang Yizhong & Paul Wang
After more than one year of tortuous negotiations and the quarrels between the United States and China, one trade deal was finally done on December 13. China announced that it and the United States have come to an agreement on a Phase One trade deal, and the White House stated the two sides having reached an historic and enforceable agreement that requires structural reforms and other changes to China’s economic including trade regime in the areas of intellectual property, technology transfer, agriculture, financial services, and currency and foreign exchange. This trade deal also establishes a strong dispute resolution system that ensures prompt and effective implementation and enforcement. Thus, the United States has agreed to modify its Section 301 tariff actions in a significant way.
There is widespread relief at the prospect of ending this conflict between the two biggest economies in the world. For example, the Dow Jones Index soared more than 100 points in reaction to China’s announcement of the deal. It argues that the Phase One trade deal aims to provide a “critical pause in the trade war which is on the verge of acceleration” and ensures trade relations “are still manageable by engagement for further negotiations in the same trajectory.” Yet, while there is cause for celebration, this deal doesn’t mean a conclusion to the trade dispute between China and the United States. At this moment, it is a small deal but a necessary step towards a right direction. Since China and the United States are different in their social, cultural and even geopolitical strategies, the ruling elites of the two sides need to demonstrate their political vision and conventional wisdom in order to ultimately determine the outcome of the whole trade disputes.
In light of Heckscher-Ohlin trade theory, developing countries like and India started to export their labor-intensive manufactures to the United States and the G-7 bloc, which trade their capital-intensive industrial products to China. As a result, the opening of China to world trade has profoundly affected other countries, the developed and the developing ones as well. Yet, the issue arises how can each entity understand the national politics of trade within the broader international context? How does the strategic and institutional environment affect whether countries get what they want from world trade? As American scholar Jeffry Frieden put it, when governments make national trade policies, they take into account what other governments are likely to do in response. A government that raises tariffs dramatically might find other countries retaliating with even higher barriers to its exports.
According to what is said above, great power trade dispute or economic competition is nothing new. Yet, the trade war between the United States and China is clearly beyond normal. It is argued that the rivalry between China and the United States in the 21stcentury holds an uncanny resemblance to the one between Germany and Great Britain in the 19th century. Both rivalries take place amidst the emergence of economic globalization and explosive technological innovation. Both feature a rising power with a state-protected economic system challenging an established democracy with a free-market economic system. And both rivalries feature countries enmeshed in profound interdependence wielding tariff threats, standard-setting, technology theft, financial power, and infrastructure investment for advantage. Due to this, the two powers have made all efforts to find a useful guide for each policymakers to defuse the dynamics of the emerging Sino-American trade war. Yet, this is not easy because the issue is beyond trade itself. There is a patently systematic clash between China and the United States, which is perceived of trying to suppress China’s development with every tool available. For the sake of this, the Chinese government has to calculate how much of a compromise it is willing to make.
Meanwhile, the hawkish groups in the U.S. are trying to stir up confrontation between the two countries. This is the very reason why the trade war had lasted so long and the talks on the issues remained so tortuous. Frankly, the United States has much more leverages in the talks with China. It requires that American response should neither be blindly provocative nor naively cooperative; instead it should be competitive. The right approach, in contrast to tariffs, would be to work with allies to strengthen rules, set standards, punish Chinese industrial policy and technology theft, invest in research, welcome the world’s best and brightest, and create alternatives to its geo-economic statecraft. Yet, the result is that China is playing a good hand well, simply because the Trump administration did not work together with its allies.
Deeply involved himself into the domestic partisan strife, Trump and his core team finally agreed on the text of a phase one economic and trade agreement, based on the principle of equality and mutual respect. The text includes nine chapters: the preface, intellectual property rights, technology transfer, food and agricultural products, financial services, exchange rate and transparency, trade expansion, bilateral assessment and dispute settlement, and the final terms. For sure China agreed to increase imports of U.S. agricultural products, and more importantly for the first time in any trade agreement, China has agreed to end its long-standing practice of forcing or pressuring foreign companies to transfer their technology to Chinese companies as a condition for obtaining market access, administrative approvals, or receiving advantages from the government. China also commits to provide transparency, fairness, and due process in administrative proceedings and to have technology transfer and licensing take place on market terms. In effect, the Phase One deal is generally in line with the main direction of China’s deepening reform and opening-up, as well as the internal needs for advancing with high-quality economic development.
Strategically, this is a relatively small deal but a truly necessary step in the right direction. All is clear that phase two negotiations depend on phase one implementation of phase one agreement, therefore, both sides have agreed to complete their necessary procedures including the legal review, translation, and proofreading as soon as possible, and discuss the detailed arrangements for officially signing the agreement. Once the deal is signed, China will increase imports of agricultural products from the United States. In turn, the U.S. will import pears, oranges, and fresh dates from China. The U.S. also pledged to lift some restrictions on Chinese aquatic products. As a Chinese official added that China’s core concern in economic and trade negotiations has been the removal of additional tariffs, and now both sides have reached consensus in this regard. As the two largest economies of the world—China and the United States, phase one trade deal is equally good news for all other countries and surely provides stability in global trade.
All in all, although there were disputes and quarrels during the long negotiations, the phase one trade deal between the two sides will result in shoring up confidence in the world economy and maintaining international trade order. A patent lesson is also that there is no winner in a trade war and China is dedicated to oppose to protectionism since it is against the rule of WTO. To that end, the two powers are expected to meet each other halfway, effectively manage their differences and foster a coordinated, cooperative and stable relationship. Therefore, it is fair to say that this landmark trade deal marks critical progress toward a more balanced trade relationship and a more level playing field for both sides’ national security and business interests.
