Phase One: A long wait for not very much
U.S. President Donald Trump and Chinese Vice Premier Liu He show the signed China-U.S. phase-one economic and trade agreement
U.S. President Donald Trump and Chinese Vice Premier Liu He show the signed China-U.S. phase-one economic and trade agreement ( Photo provided by: 新華社/アフロ )

18 months after the start of the trade war a deal has been signed.  A “momentous step” said President Trump, a phase one deal to be followed by phase two, phase three, maybe even a phase four!  The need for so many phases of course is because what has just been agreed and signed falls far short of the original hopes and plans which Trump and others in the US administration had wanted when tariffs were first imposed.  The deal too falls behind the earlier drafts of May of last year which had looked to secure specific changes in Chinese law to better protect foreign interests and such changes were not secured in this deal.

On paper the deal suits Trump to a tee.  Its headline number of 200 billion USD of additional Chinese purchases over 2017 levels in the first two years after signing is a big number even for Trump.  The four sectors of manufactured goods, energy, services and agriculture all look set to benefit handsomely.  Both sides have presented numbers to show the increase in buying over the coming two years.  Whatever this deal is it isn’t free trade which Trump talks about, it’s a very managed and state top-down trade deal.  To that extent nothing has changed from the Chinese side.  Both sides claim that the deal does not run counter to WTO rules which explicitly state that no country receives preferential treatment in trade and indeed European officials are worried that this deal, and possible further deals will do exactly that at Europe’s expense.  They are also concerned that with Trump now having completed a China deal his attention and tariffs will turn again to Europe who he claims has been even worse than China in taking advantage of America!  The global trade order is not back to normal, and indeed is unlikely to be so anytime soon.  Trump’s actions have brought about a fundamental shift in trade relations bringing both good and bad consequences.

Upon signing Trump suggested that he would visit China and meet with his great friend Xi Jinping to help start the next phase of discussions although it was also suggested that phase two might not happen till after the US general election.  Clearly there is no urgency to build on what has just been agreed.  And after the election means what exactly if Trump and his team are not even there?

What has been achieved is a trade truce rather than a trade deal of substance.  Phase One has allowed China to make bold commitments to buy selected US goods and services and in return the US has reduced some tariffs and scrapped proposed new ones.  Removal of all tariffs was a key Chinese requirement so it would appear that China lost on that point.  It could certainly be argued but that China blinked first in this round.  The Chinese side gave way on the “numbers” side but probably held their own on the legal and market opening side.  Committing to buy more goods and services of things China needs like planes, agriculture and energy is not really such a concession from China.

On intellectual property protection China “recognizes the importance of establishing and implementing a comprehensive legal system of intellectual property protection”.  It further recognized that “forced technology transfer is a significant concern”.  This is weak language and does nothing to address the reality of dealing in China especially at the local level.  Fine sounding words in Beijing are one thing, dealing with the local mayor is something else again.  China will be happy to work with such vague formulation and nothing in the deal could be read to think that the Chinese economic system is changing in a meaningful way.

State backed, directed and subsidized industries will continue as before.  Changes in China will come about due to credit squeezes and local conditions rather than anything this deal has announced.  China’s push to develop a slew of hi-tech industries under the Made in China 2025 program might not be mentioned much at the moment but it doesn’t mean it still isn’t happening.  Xi Jinping’s China remains as Nationalistic and self-sufficient focused as it always has.

An enforcement mechanism of sorts was built into this deal but how it will be implemented is still far from clear.  It does allow for relatively quick action from either side and holding China to account is a mainstay of what Trump’s team has been aiming for.

Chapter 4 of the agreement specifically covers financial services but much of what is promised is effectively already happening.  GRICI has previously covered how the financial sector is opening to foreign firms but opening alone is not enough anymore.  Chinese local firms have become dominate in so many areas and the financial environment has changed out of recognition compared to when foreign firms started to demand access.  From the US side they promise to treat applications from Chinese firms for access into the US financial sphere “expeditiously” but that doesn’t mean the approval will be granted, it could well end up with a much quicker no response!  US financial regulators should be very worried about Chinese financial companies’ compliance and control functions; these concerns are real but if the US rejects such applications then that will only sour the goodwill which this deal has brought.  Statements on both sides promising faster processing of applications and a more open attitude to cross investment can only do so much.

Phase One is notable for what has been left out.  No mention of Huawei and rightly so.  By quirk of fate the extradition trial of CFO Meng Wanzhou started only a few days after the signing of deal.  The underlying US case deals with question of business practice, false disclosure and sanctions busting with Iran.  None of those issues have gone away in China.

China must be pleased that there is no mention in the deal around broader human rights concerns, Hong Kong or Xinjiang.  But if the US had tried to insert language around those issues then a deal would never have been signed.  This is vanilla trade pure and simply.  It ramps down immediate tensions, but those issues remain a significant thorn in the US China relationship with none of them going away anytime soon.  It does beg the question of course that if the US and China would settle for this why has it taken so long to get here?  There is virtually nothing in this deal could not have been agreed a year or more ago?  There has been a lot of shouting, tweeting and noise making for not very much although the long period of tariffs did show to China that the US was clearly wanting to change the relation but does Trump really have the commitment to follow through on all those other difficult topics?

It is worrying that with so little progress of the big issues between the US and China that the President seems so keen to go to China.  A bold statement to say that he wants to go to Hong Kong would send a clear signal of support for the demands for proper democracy in the city, but the Chinese would never allow such a visit.  Yet how can Trump go and receive all the grand parades and flag waving in Beijing while in the West of the country over 1 million Uyghurs remain in camps and under a total surveillance police state?  Hard to square being tough on China while giving Xi Jinping the credibility of hosting the leader of the free world.  Chinese state policy still falls far short of international norms and the US should be the leader in speaking out in defense of democracy and basic human rights.

Phase One buys time for China as it addresses a slew of continuing problems.  The trade war impact on China was of course negative but the broader slowdown was a result of an overburdened economy mired in growing bad debts.  That hasn’t changed at all and the latest external shock to the economy, the Wuhan flu, will only cause greater problems.  Last month GRICI looked at the problems facing China as it enters the new decade and health problems were a real concern.  Last year’s swine fever showed the poor level of animal husbandry and associated reporting and oversight, that is now being echoed in was is happening in Wuhan.  Much of China continues to work okay as long as there are no shocks to the system.  Wuhan flu has become a very prominent and significant shock.  The State’s response is better than SARS of 2002/03 but there remains a high level of distrust in the State’s response and reporting.  That such disruptions come at the major Chinese holiday season only increases the impact in terms of contagion and economic impact.  The Wuhan flu sends a timely reminder of the old phrase, “Men make plans and God laughs”.  State directed economies and promises of further purchases must always face the reality of the market and the actual situation on the ground.  Being flexible enough to respond and adapt is a corner stone of developed open economies.  As conditions changes then policies need to change.  Negotiators in a room, however well-intentioned can’t dictate the future.

Engagement with China is a reality of the modern world.  No country can isolate itself from China or ignore what is doing domestically or internationally whether that be via the Belt and Road Initiative or in the South China Sea.  Trading with China, the world’s second largest economy, must form part of that engagement but the engagement with China has been abused by the Chinese side over the past decades.  A reset of relations and engagement was well and truly needed.  Many major issues still remain outstanding with China and using trade deficits as a measure of those problems is a very poor and ineffective measure.  This deal takes some tension out of the capital markets and supply chains, at least for the moment, but does very little to properly address the asymmetric relationship and engagement between the US, and by extension the world, and China.

Chinese spying and theft of intellectual property via corporate or academic channels remains an ongoing concern.  Basic human rights violations, illegal even under China’s own constitution remain daily occurrences.  Unfair and bias treatment of foreign companies and subsidies to State entities is how the Chinese economy operates.  The Phase One deal did nothing to properly tackle these issues and further movement via further phases seems years away.  US political opinion has not softened around China Senator Rubio and others will not be pacified by this bill and he will continue to push for tougher capital market restrictions around Chinese companies which seek to take advantage of US capital markets.

The trade war may have paused but it has certainly not finished.  Accusation of breaches of the agreement are bound to come up in the coming months and the rhetoric will become inflamed again.  Trump’s great friend Xi Jinping will no doubt fail him just as his other new best friend Kim Jong Un has.  China’s economy remains in a difficult position, it may not collapse as some predict, but minimal growth and an inability to work out bad debts will take a growing toll for many years.  The Wuhan flu epidemic is a reminder of the still poor health systems in China and even poorer reporting and information flows.  China’s ambition will be severely dented in the coming years, this temporary truce will do little to help the economy or change China, yet fundamental change is required in China.  No deal imposed from outside though can make the required changes.  China and the Chinese people need to demand and bring about the required changes for greater openness and accountability throughout the system.  That though seems as remote as it ever did, trade deal or no trade deal.

フレイザー・ハウイー(Howie, Fraser)|アナリスト。ケンブリッジ大学で物理を専攻し、北京語言文化大学で中国語を学んだのち、20年以上にわたりアジア株を中心に取引と分析、執筆活動を行う。この間、香港、北京、シンガポールでベアリングス銀行、バンカース・トラスト、モルガン・スタンレー、中国国際金融(CICC)に勤務。2003年から2012年まではフランス系証券会社のCLSAアジア・パシフィック・マーケッツ(シンガポール)で上場派生商品と疑似ストックオプション担当の代表取締役を務めた。「エコノミスト」誌2011年ブック・オブ・ザ・イヤーを受賞し、ブルームバーグのビジネス書トップ10に選ばれた“Red Capitalism : The Fragile Financial Foundations of China's Extraordinary Rise”(赤い資本主義:中国の並外れた成長と脆弱な金融基盤)をはじめ、3冊の共著書がある。「ウォール・ストリート・ジャーナル」、「フォーリン・ポリシー」、「チャイナ・エコノミック・クォータリー」、「日経アジアレビュー」に定期的に寄稿するほか、CNBC、ブルームバーグ、BBCにコメンテーターとして頻繫に登場している。 // Fraser Howie is co-author of three books on the Chinese financial system, Red Capitalism: The Fragile Financial Foundations of China’s Extraordinary Rise (named a Book of the Year 2011 by The Economist magazine and one of the top ten business books of the year by Bloomberg), Privatizing China: Inside China’s Stock Markets and “To Get Rich is Glorious” China’s Stock Market in the ‘80s and ‘90s. He studied Natural Sciences (Physics) at Cambridge University and Chinese at Beijing Language and Culture University and for over twenty years has been trading, analyzing and writing about Asian stock markets. During that time he has worked in Hong Kong Beijing and Singapore. He has worked for Baring Securities, Bankers Trust, Morgan Stanley, CICC and from 2003 to 2012 he worked at CLSA as a Managing Director in the Listed Derivatives and Synthetic Equity department. His work has been published in the Wall Street Journal, Foreign Policy, China Economic Quarterly and the Nikkei Asian Review, and is a regular commentator on CNBC, Bloomberg and the BBC.