The “phase one” deal has halted the trade war between the United States and China, but it has also created problems that could affect China’s economic development and relations with its trading partners.
The biggest problem is the feasibility of the deal. China has agreed to purchase an additional $200 billion of US industrial and agricultural goods, energy and services in 2020 and 2021 compared to 2017. US exports to China plunged after that year, which means that China has promised to increase the import of US goods by some $240 billion.
The need for a surge in US exports is questionable in light of the economic slowdown in China. Beijing can certainly use the command-and-control instruments to increase purchases in the United States. But this could encourage US suppliers to use non-market methods to deliver shoddy goods at higher prices.
By signing the deal with the United States, Beijing has added a new factor to its economic relations with other countries. The deal has undercut the efforts of Asian and Latin American suppliers of raw materials and agricultural products to replace the United States on the Chinese market. It’s just as well that Russia’s soybean production plans with a view to increasing exports to China have remained on paper. The US-Chinese deal has provided a fresh reminder to Russia that foreign economic strategies should be thoroughly analyzed with due regard for political variables.
China may be in for a few surprises in Europe. The US-Chinese trade deal has led the EU to believe that Trump’s strategy of pressuring China could succeed. Calls have been made in Europe to take a hard stand against China so as to force it to accept a deal on the EU’s terms. Europe, whose monopoly on the export of innovative technology to China has been only restricted by the US sanctions, is preparing for a tough bargain over an investment agreement with China.
Chinese officials claim that the deal with the United States is based on market rules and will not affect others’ interests, while China’s increased economic openness will benefit all sides, including Europe. This is true, hypothetically. However, the sides will soon start playing a zero-sum game. China’s commitments to the United States are too great. Full implementation of the US-Chinese deal will prevent other countries from increasing their trade with China in the years to come and will force some suppliers to leave the Chinese market.
During the US-Chinese trade war, American farmers received government aid for two years. In fact, the US budget revenue from the higher tariffs on Chinese imports was used to help American farmers. But now the US administration has announced that the farmers would receive the last compensation worth $16 billion in May, after which they will prosper from large Chinese orders. The deal appears to be advantageous all around: the tariffs on Chinese goods will remain in force, the US budget will be replenished, and the farmers will be able to feed themselves. The positive effect of the deal will manifest itself in the fall of 2020, before the presidential election, which will greatly increase Trump’s re-election chances.
Can the United States and China take the next step and sign a “phase two” deal? Washington’s strategy is to ensure that China reciprocates the US tariff relief by launching deep structural reforms and abandoning government support for plans to create a high-tech innovative economy. Washington used trade negotiations to undermine the economic basis of “socialism with Chinese characteristics” without demanding a change of government.
Rivalry with the United States has become an element of China’s domestic economic policy. The Chinese advocates of reform claim that the acceptance of harsh US conditions will benefit the country. The emergence of foreigners on the domestic market and reduced support for Chinese companies will increase competition, which will eventually boost Chinese businesses. They cite the example of China’s accession to the WTO, which turned out to be a major success despite the numerous initial fears.
However, the Chinese reformists’ attempts to use the Trump factor to force the authorities to launch radical changes could have an unexpected effect. For a long time, China explained its achievements by its refusal to use the shock therapy model. But now the withdrawal of government support from the public sector could produce a shock that will bring China revenue from greater trade with the US but will deprive Beijing of the leverage for encouraging runaway technological development. In this case, China will be unable to attain the goal of becoming a global technological leader by the 2050s. This will call into question the relevance of the Chinese Communist Party’s plans and, hence, the legitimacy of its government.
To conclude, Beijing is unlikely to speed up the phase two talks this year but will prefer waiting for the outcome of the US presidential election.