The United States and China announced the much-awaited phase one of their trade deal on 13 December, sending a sigh of relief in markets across the world. Details of the deal continue to trickle in since the final draft is still not out. Here is what we know of it so far.
US Commitments in Phase One
Suspension: The US will not implement the additional 15% tariff on $160 billion worth of Chinese goods that was to come into effect from 15 December 2019.
Reduction: US tariffs on $120 billion worth of Chinese goods will be reduced from 15% to 7.5%. These include items like bluetooth headphones, smart speakers and televisions.
Continuation: 25% tariffs on $250 billion worth of Chinese imports will remain unchanged.
Chinese Commitments in Phase One
Since the tariffs were initiated by the US while demanding a change in China’s trade practices, Chinese commitments are more of policy nature than those related to tariffs.
Issues covered: According to Chinese officials, this phase will cover issues related to:
- Protection of intellectual property.
- Transfer of technology.
- Expansion of trade.
- Expansion of energy imports.
- Expansion of services imports.
- Purchase of agricultural products. The US puts the annual value of these purchases between $40 billion to $50 billion over the next two years, but the Chinese side has not put it into writing yet.
Office of the US trade Trade Representative (USTR) added these issues to the list:
- Financial services.
- Foreign exchange.
- $200 billion worth of imports from US over the next two years. These range from airplanes to food items.
Suspension: Chinese officials stated that they would not be imposing tariffs on US products that were scheduled for 15 December. As the tit-for-tat imposition had been ensuing since the start of the trade war, these tariffs could have been as high as 15% on $160 billion of goods that the US was planning to introduce.
When Will the Deal Be Signed?
The United States and China will sign the trade deal in early January according to US Trade Representative Robert Lighthizer. Until then, speculations will be rife as to what exactly has China agreed in return of the suspended US tariffs.
We can expect changes in the commitments made by the negotiators as the agreement is shuttling back and forth between Washington DC and Beijing for approvals, legal reviews, and translations.
Lighthizer also refuted the possibility of presidents of the two countries meeting for the signing. It will be, instead, ministerial-level reps who will be meeting to sign the final draft of the deal.
Phase Two of the Trade Deal
US Trade Representative stated that his government will not wait for the 2020 presidential election for taking up phase two of the deal. Whereas, Treasury Secretary Steven Mnuchin believes that it will come in stages but its timeline is yet to be determined.
Future of the Trade War
The US is not planning to impose new tariffs on Chinese imports. Although the Trade Representative links that with the intent of his Chinese counterparts.
No promises have been made by the US on future rollbacks of the remaining tariffs. The US is skeptical of Chinese commitments and is thus not committing to any future concessions.
With a looming threat of President Donald Trump’s impeachment trial and the presidential election due next year, political difficulties for him point out he will not be upsetting his voters from ‘farmer states’ where the majority of his vote bank lies. The protracted trade war had severely shaken their confidence in Trump’s ability to achieve the tariffs’ objectives. That means the deal will certainly go through in some form or the other.
No End in Sight
When phase one of the deal was signed, global markets responded but only with a slight positivity. The response reflected investor sentiment that the deal was merely a temporary relief in a battle that will last much longer.
The trade war has transformed from a single individual’s wish – i.e. Donald Trump’s – to a bipartisan issue in the US. China hawks in the administration have thrown weight behind Trump’s decision to challenge the growing clout of China in international trade.
Now that China has moved on from producing low-end products like apparel and home appliances to raising 5G networks, calls are growing among US lawmakers that their country’s technological and economic superiority has to be defended. For this very reason, the imposition of tariffs on China is finding support and is not likely to go away soon.
CLSA, a Hong Kong-based investment group, predicts that the trade war will continue for at least three more years but with the possibility of more phased deals.