COMMENTARY: Phase One Trade Deal Likely Marks High Point

China’s agreement to buy more products and implement some reforms can’t mask bigger problems and long-term dimming relationship.

Mark Melnicoe
    Dec 21, 2019 5:00 AM  PT
COMMENTARY: Phase One Trade Deal Likely Marks High Point
resource from: (Image: Mark Melnicoe)   
(Image: Mark Melnicoe)

The Trump administration predictably is touting the phase-one trade agreement as a big deal, with China agreeing to multiple concessions that amount to a major win for American farmers and businesses.

The Office of the Trade Representative calls it a "historic and enforceable agreement" that will require "structural reforms and other changes to China's economic and trade regime."

But in truth, we are not yet even back to where we started before the trade war began some 20 months ago, when President Trump fired the opening salvo with new tariffs on Chinese products. Yes, the Chinese side is agreeing to some structural reforms, including in such key areas as intellectual property, technology transfers and financial services. But these are moves they were making anyway.

Months ago, Beijing announced a full opening to foreign companies in financial services, including brokerage houses and insurers. It has been advancing laws prohibiting Chinese firms from coercing transfers of technology as a condition of doing business. And for years it has been greatly improving IP protection by enacting new laws and creating IP courts around the country.

President Xi Jinping's economic team has undertaken these reforms because it knows they are needed to keep the country's economic growth from going off the rails. The West may not like the pace of China's reforms, but they have been progressing on a more or less consistent basis for the past 30 years.

"These measures are in line with our reforms to strengthen (intellectual property) protection, and this will also help China promote its economic development," said Wang Shouwen, China's vice-minister of commerce.

He could have been talking about any of the reforms the government is pushing forward. For doing what has largely been in the works, China gains billions of dollars in tariff relief. Gone are 15% taxes on $160 billion in Chinese consumer products such as laptops and smartphones that were set to take effect last Sunday. China also gets a 50% reduction on the 15% tariffs on another $120 billion in goods that were imposed last September 1.

The 25% tariffs the U.S. has imposed on another $250 billion in Chinese products will remain for now. 

In return, China canceled a planned 25% duties on American cars and other tariffs that also were set to take effect last Sunday. China also agrees to hike its purchases of imports, especially of farm products, by $200 billion over the next two years. Again, this is hardly a sacrifice for Beijing, which would make most of those purchases in normal times.

No Turning Back

Not that times are normal. The trade war has been good for no one, has hurt global economic growth and has spun badly out of control while morphing into a technology war.

"The trade war has not paid off," wrote Scott Kennedy, a researcher of Chinese business and economics at the Center for Strategic and International Studies. "Total U.S.-China trade and direct investment have slowed, but these changes reflect the diversion of trade to others, not the movement of manufacturing back to the United States."

"Moreover, far from abandoning its efforts to achieve technological independence, China is doubling down on what it calls ‘self-reliance.' The deal's apparent big winners, U.S. farmers, were not in harm's way before the trade war, and they likely would have sold just as much in aggregate to China had the trade war never commenced."

Kennedy is onto something when he talks about China going on a path toward tech independence. Repelled by across-the-board efforts by the Trump administration to rein in its tech development, Beijing is pursuing a go-it-alone strategy. This month it announced the drastic step of ridding all government offices and public institutions of American-made computer equipment and software.

As Chinese math and engineering students increasingly are turned away from American universities, they are going home to get jobs in an economy that has become more promising for them than if they remain in the U.S. China's central government is pushing hard for indigenous development of artificial intelligence, microprocessor manufacturing, advanced materials, clean transport and a host of other technologies where it wants to assume global leadership a decade from now.

Where China lags behind, it is redoubling its efforts. Last week, the two biggest operating system makers in China announced they will merge and build a new "domestic operating system" for computers to replace Microsoft's (Nasdaq: MSFT) Windows. Both companies – China Standard Software (CS2C) and Tianjin Kylin Information (TKC) have ties to the government in Beijing.

Huawei, the world's largest telecom equipment company, has built its most current and advanced smartphone without any American parts. Despite U.S. efforts to keep its emerging 5G systems out of allied countries, many of them in Europe, are ignoring those demands and making deals with Huawei, which is seeing rapid growth in its 5G business.

The global battle for tech supremacy is now under way, hastened by the Trump administration's actions against China. Beijing is not about to give up on any of its ambitions. Because the tech war splinters off into critical areas such as security and military capabilities, there will be no going back.

It would be a good idea to enjoy this so-called phase-one agreement as officials put the language together for a signing in the next few weeks. Because it's unlikely that a phase two or any others will take place.

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