US and china has signed phase-1 trade deal in Washington, at a ceremony at the white house, marking a truce in the trade war that rattled the global economy for nearly two years. Celebrating the trade deal, US president Donald Trump said the pact would be “transformative” for the US economy while Chinese leader called it a “win-win” deal that would help foster better relations between the two countries.
The deal, however isn’t all rosy as it is being projected, since the devil is in the details. US and China have engaged in a tit-for-tat tariff war since 2018, which has led to additional back to back tariffs being levied on more than $450 billion worth of traded goods. The ongoing dispute has disrupted trade flows, dampened global economic growth and unnerved investors. The trade war had multiple stakeholders apart from the governments of the two competing economic powerhouses, and the preliminary deal has subsequent winners and losers.
In the trade truce the leaders of both countries have claimed to be major victors. However, both sides incurred major losses in this war. The trade deal is not really a tariffs waiver deal and the concessions made by china aren’t really sustainable. The Phase 1 deal, reached in December, waived-off planned US tariffs on Chinese-made cellular devices, laptop computers, and halved the tariff rate to 7.5 percent on about $120billion worth of other Chinese goods, including flat-panel televisions, Bluetooth headphones and footwear. But it will leave in place 25 percent tariffs on a $250bn array of Chinese industrial goods and components used by US manufacturers, and China’s retaliatory tariffs on over $100bn in US goods.
Amid the trade war and hefty tariffs on Chinese imports, US companies have incurred over $46 billion additional costs and subsequently raised input costs for US manufacturers, eroding their competitiveness. Trump, who has been touting the Phase-1 deal as a pillar of his 2020 re-election campaign, said he would agree to remove the remaining tariffs once the two sides had negotiated a “Phase 2” agreement. He said “They will all come off as soon as we finish Phase 2,” who added that he would visit China in the not-too-distant future.
The trade deal may have come across as a political victory for President Trump despite critics claim major discrepancies and lack of substance in the deal, the signing offered an opportunity for the US President to put the trade war behind him and claim an achievement heading into the 2020 presidential election. Polls show that most Americans agree with the president that China trades unfairly, but they generally support free trade and oppose tariffs. Indeed, Republicans lost several congressional seats in 2018 due to crippling effects of trade war on domestic markets. In fact US president has said that the negotiations for the second phase of a pending trade deal with China will begin promptly but the outcome may wait until after US presidential elections. Trump has defended maintaining the bulk of the tariffs, saying they will provide leverage in future talks.
While, China agreed to buy at least $200 billion in additional US goods and services over two years, including $32 billion in additional imports of US farm products, in line with the monetary values and time-frame mentioned. The commitment comes as an ambitious pledge- since Chinese Domestic producers will suffer the most and can’t survive without state subsidies. If Beijing fulfills its pledge the additional imports pledge would mean direct competition for Chinese farmers, who are mostly small-scale and not competitive in this field. After signing the agreement, Chinese Vice premier Liu said Chinese companies would buy $40bilion in US agricultural products annually over the next two years “based on market conditions.” As a result Soybean futures, which traded 0.4 percent lower throughout much of the deal-signing ceremony, retreated even further after Liu’s remarks, a sign that farmers and traders were uncertain about the purchase goals. Brazil and other countries that export goods and services to China are likely to suffer under the initial trade deal as China will reduce its purchase of goods from other countries. The countries benefitting as a result of trade war, which redirected an estimated $165billion in trade, will concomitantly be at the losing end.
The enforcement mechanism agreed under the preliminary deal may become point of friction between the signatory parties. The Trump administration is touting the US-China Phase-1 trade deal’s dispute settlement and enforcement mechanism as the major difference between the agreement unveiled on and past pledges by Beijing to change its trade practices. But the final result of any dispute that prompts new US tariffs to be slapped back on Chinese goods could tear the whole trade deal apart. According to the agreement, if the offending party disagrees with such a result, its only recourse is to quit the agreement. There are no provisions for appeal or levying retaliatory tariffs. The agreement explains “If the Party Complained Against considers that the action of the Complaining Party was taken in bad faith, the remedy is to withdraw from this Agreement by providing written notice of withdrawal to the Complaining Party,”. Under that scenario, an enforcement action could cause the agreement to collapse. Some other US trade deals, such as the new US-Mexico-Canada Agreement, employ third-party arbitration panels to settle disputes. “The Phase 1 enforcement mechanism is very simplistic. It’s basically binary, either compliance or another trade war.
Trump administration insist that they have set up a robust process for resolving disputes, with each country opening an enforcement office to field and review complaints about compliance. Those grievances will be aired through a series of consultations with escalating levels of officials over a roughly 90-day period before penalties can be levied. The two countries have also agreed to revive regular trade consultations, with monthly working-level meetings, quarterly deputy meetings and semi-annual ministerial level conferences, similar to past US-China economic dialogues.
While the speculation around the preliminary trade deal will continue till the phase-2 deal is signed by the end of 2020,the deal has eased friction in the trade between the two countries and the world in general. While major stock markets in Europe and Asia posted muted gains, S&P 500 in US crossed 3,300 for the first time and the Dow and the Nasdaq opened at new highs.The Dow Jones Industrial Average rose 101.73 points, or 0.35%, at the open to 29,131.95.The S&P 500 opened higher by 13.68 points, or 0.42%, at 3,302.97. The Nasdaq Composite gained 54.75 points, or 0.59%, to 9,313.45 at the opening bell. The 18-month trade war finally has a truce but it is yet to be seen how long this peace time persists, since its fall out would be inimical for the global economy, which is already surviving slow economic growth and rising global debts.