New China trade deal leaves many issues unresolved

What it means 

The two sides are expected to restart the kind of broad economic dialogue that was begun by President George W. Bush and then-Chinese President Hu Jintao in 2006.

But analysts of all stripes doubt they'll see anything substantive beyond the first-stage deal.

“This may be as far as we're going to go,” said David Bachman, a China expert at the University of Washington in Seattle. "I think (Phase 1) was really an attempt to put the China dispute on the back burner until after the election, with expectation that the Chinese will step up their agricultural purchases significantly and that the Trump campaign can claim that farmers got a good deal.”

As for the future of the U.S.-China relationship, he said: “We’re going to be sort of stuck in between some cooperation-competition rivalry on the one hand, and then out-and-out cold war on the other.

"How we describe that and what that means in real practice is just going to have to be something we work out," he predicted.

Where gaps remain 

The signing signified a cease-fire in the trade war, but the two nations remain on the cusp of long-term decisions that will have potentially harsh consequences for Washington and Beijing.

The United States already has moved to restrict Chinese investments in America, deny licenses for Chinese telecom firms and blacklist others, notably Huawei. Research collaborations are coming under scrutiny, and more Chinese international students are being denied visas.

“That means that the fundamental tensions between the U.S. and China will not subside, even if the administration has achieved some incremental progress as well as met certain political goals that could calm the relationship for the short term," said Claire Reade, who served as the first chief counsel for China trade enforcement at the Office of the U.S. Trade Representative.

The road ahead 

Over time, the relationship between the world's two economic superpowers seems all but certain to go in one of two directions.

In the best-case scenario, both governments would pull back from confrontation, expanding — not curbing — their mutual dependency on trade, and at least appeasing some of Washington's most serious grievances.

Those include industrial espionage and Beijing's heavy subsidies for its many state-owned enterprises that most economists say undercut foreign rivals and distort global markets.

Turning toward a strategy of compromise and short-term sacrifice instead of confrontation would be difficult for both sides under the best of circumstances, and especially so for the Chinese Communist Party and its elites, who are deeply invested in the status quo.

What could go wrong 

An alternative scenario represents a darker and even more hazardous road ahead.

If the hard-line, nationalistic turn in both countries continues, as seems highly possible in view of a rising tendency among Americans to see China as an adversary, the result could be a new cold war.

That would potentially lead to a more isolated and embattled Beijing, with reduced access to Western markets that now support a Chinese economy still dependent on trade and foreign technology.

Eventually, China might be able to shift more assuredly to domestic consumption and homegrown innovation. But the transition, even if ultimately successful, would put enormous political pressure on a regime already becoming more and more authoritarian.

The stakes for China  

The Phase 1 agreement signed Wednesday includes pledges by China to boost U.S. exports by about $200 billion over two years, including farm goods, energy and manufactured products. Whether China can meet these commitments, the increased purchases will nonetheless be welcomed by important Trump constituents in rural America and on Wall Street.

Robert Lighthizer, Trump's top trade official, has said the 86-page agreement also includes Chinese commitments on intellectual property, financial services and technology transfer.

Credit: Steve Helber

Credit: Steve Helber

Analysts, however, said there was little to indicate that China had gone beyond plans already in place and that the real question was whether Beijing would carry them out in meaningful ways.

Beijing, for its part, is getting a small rollback of tariffs. And as a goodwill gesture, Washington withdrew its designation of China as a currency manipulator, although the label had little basis or practical significance.

The decisions that shape the future of China are by no means entirely centered in Washington.

"Xi Jinping faces the trade-off between: Does he want control, or is he so concerned about prospects for economic growth that he takes a more hands-off approach?" said David Bachman, a China expert at the University of Washington in Seattle. Now, he said, there's nothing to indicate that Xi would back down.

The stakes for the United States

Analysts agree the United States would do well to partner with Europe and Japan in pressuring China to make structural reforms, but Trump has by and large pursued trade actions unilaterally. And he has alienated once-stalwart allies by slapping tariffs on them as well, and lashing them with harsh rhetoric over their trade practices.

Credit: DANIEL ACKER

Credit: DANIEL ACKER

“When we talk about decoupling or an economic iron curtain, I will tell you, I don't find any other countries that are looking to decouple from China's economy,” said Hank Paulson, former Treasury secretary in the Bush administration and founder of the Paulson Institute, which focuses on U.S.-China issues. “We need a new framework that recognizes today's realities, and we need to enlist our allies — which are a huge strategic advantage.”

Robert Atkinson, president of the Information Technology and Innovation Foundation, a Washington-based think tank that has been sharply critical of China's mercantilist behavior, said European officials had essentially told him: “Why would we work with the Trump administration when they want to put tariffs on our cars?”

Tariff impact in China 

As a result of the tariff war, China’s economic growth sank to a new multi-decade low in 2019, but forecasters said the Phase 1 truce might help to revive consumer and business activity.

According to government data released Friday, China's economy grew by 6.1%, down from 2018’s 6.6%, which was already the lowest since 1990. Growth in the three months ending in December held steady at the previous quarter’s level of 6% over a year earlier.

The Chinese downturn might not have bottomed out yet, but improved activity in December suggested the cooling of tensions might be encouraging companies and consumers to spend and invest, private sector economists said.

The agreement "is a signal that the situation is unlikely to deteriorate,” said Chaoping Zhu of J.P. Morgan Asset Management in a report.

“Corporate confidence keeps improving,” said Zhu. That might help to “provide strong support” to economic growth.

Global impact 

What happens in China ripples across the globe.

An economic lull in China reverberates in the many countries — from copper-producing Chile to iron ore-producing Australia — that feed Chinese factories with raw materials.

Chinese exports ended 2019 up 0.5% despite the tariff war and weaker global demand.

Manufacturers stepped up efforts to sell to other markets, recording double-digit gains in exports to France, Canada and other economies.

“Sluggish global growth will continue to challenge the external outlook, but we expect the phase one deal with the U.S. to have a favorable impact on exports and support domestic sentiment and confidence,” said Louis Kuijs of Oxford Economics in a report.

Other weaknesses 

Chinese exporters have been battered by a bigger blow from weakness in consumption.

Households, spooked by the trade war and job losses, put off big purchases. Auto sales fell for second year in 2019, tumbling 9.6%. Growth in retail spending decelerated to 8% over a year earlier, down from 8.2% in the first nine months of the year.

The trade war added to pressure on Chinese leaders who also are struggling to shore up growth and rein in surging food costs following a disease outbreak that slashed supplies of pork, the country’s staple meat, and sent prices soaring.

The cost of pork spiked 42.5% in 2019, propelling food price inflation to 7%, more than double the ruling party's 3% target.

Farming 

American farmers remain uneasy about the prospects for exports.

Farmers have seen China go from consistently being one of the top two export markets for U.S. crops over a decade to the fifth-largest market for agricultural exports in 2018 as a result of the tariffs.

China's farm purchases plunged by about half in 2018 to $9.2 billion from the previous year's $19.6 billion after the country imposed retaliatory tariffs on $120 billion in U.S. exports, including soybeans, pork and other farm products.

Despite the signing of the preliminary trade deal, many farmers remain skeptical about how many American farm goods China will buy.

“Time will tell whether they are actually committed to buy more from the United States,” said Minnesota farmer Gary Wertish, who is president of the Minnesota Farmers Union.

“We want to get back to where we are taking every third row of soybeans to them in China and then at the same time keeping some of the new markets we've developed," said Indiana farmer Joe Steinkamp. “Hopefully in the long run we'll come out ahead.”

Where Donald Trump stands 

Trump described the roller-coaster negotiations, including punishing tit-for-tat tariffs, as "tough, honest, open and respectful," and said he would visit China "in the not too distant future."

Up to now, Trump's approach to China has been a hodgepodge of disparate and sometimes-conflicting policies on trade, technology and national security, reflecting differences within the administration between China hardliners and those advocating a more cooperative tack in dealing with China.

Trump has been consistent in demanding more Chinese purchases of U.S. goods and reducing the large American trade deficit, and he has had modest success. Less clear are his convictions and resolve in taking on China to make fundamental changes to its economic system.

"My take on Phase 1 is that it largely restores the status quo," said Scott Paul, president of the Alliance for American Manufacturing, a labor-industry proponent for fair trade. "I'm not optimistic that we'll get a Phase 2 deal that's going to dramatically alter the landscape.

"And in that way," he said, Trump "will have adopted the pattern of past administrations where they just kick the can down the road on these very tough issues."

The one difference, Paul noted, is that Trump has made extensive use of tariffs and has kept most of them in place as leverage for future talks. That could push more U.S. multinationals with operations in China to look for new places for production and supplies, mostly in other parts of Asia.

At the same time, Trump's tariffs and Chinese retaliatory duties on American goods have not only squeezed farmers but also caused a shrinking of business spending in the United States and volatility in stock markets.

"It's going to take an all-out strategy from the administration," said Paul, and Trump may not want to do anything to risk disrupting financial markets and the broader economy ahead of the November election.

Previously 

For much of the last four decades since China's historic economic opening, the U.S. approach had been mostly to engage and try to cooperate with Beijing, in part to encourage it to adopt a more liberal, rules-based economic system. But the last few years have seen President Xi Jinping elevating the Chinese Communist Party to a degree not seen since Mao Zedong and tightening its grip in all facets of Chinese society.

Credit: Andy Wong

Credit: Andy Wong

That has hardened attitudes in the United States toward China and fueled skepticism that Beijing will ever give up its industrial policies, even if they aren't efficient and will invariably bring conflicts with the United States.

The practical outflow of Xi's adoption of Maoist ideology is China's doubling down on state-owned enterprises and the party's top-down intervention in the economy to build global influence and leadership in critical sectors such as robotics, aerospace and artificial intelligence.

"Xi Jinping made clear that their system is working very well and that they're not going to try to make their society or their economic system look like Western capitalism," said Paulson, who has been in regular contact with senior Chinese officials.

"This is not the China we would like to have, but it is the China we got," Paulson said in an interview. "We are stuck with each other, and both sides have got to figure out a path forward which preserves global peace, stability and sustained economic growth in a rules-based system."

What's next 

Trump will highlight his policies on trade and domestic energy in a speech to U.S. farmers next week, the White House announced.

Trump is scheduled to address the American Farm Bureau Federation's convention Sunday in Austin, Texas. It will be his third appearance at the annual gathering.

Trump is also expected to discuss an updated North American trade agreement, passed by the Senate on Thursday, that the administration says will be a boon to U.S. farmers.

— This story contains reporting by Joe McDonald, Josh Funk and J. Paschke of The Associated Press. Compiled by ArLuther Lee, The Atlanta Journal-Constitution