The Phase One deal is an extremely modest step

Under the provisions of the Phase One trade agreement just signed in Washington, China has pledged to make $200 billion in purchases of US products, along with commitments in addressing intellectual property and currency concerns and improved market access in key sectors such as financial services. The US will cancel tariffs that had been scheduled to go into effect on December 15 and will cut in half a previous round of 15 percent tariffs on $120 billion in trade.

The agreement is a positive step, but an extremely modest one, which will defer the most important — and difficult — issues to subsequent negotiations. Unless and until those more difficult issues (such as industrial policies and subsidies) are meaningfully addressed, the trade war might simmer down, but it will not be resolved.

There are also legitimate questions about whether the terms of the Phase One agreement will be fully implemented. For instance, the US has stressed the large dollar value of purchases of US products that China has agreed to make, while China has instead stressed that the purchases need to be in line with market conditions and WTO obligations. Expect a few rough spots (and possible use of the agreement’s dispute settlement mechanism) when the time comes to reconcile these two not-entirely-aligned perspectives.

But let’s give credit where credit is due. US and Chinese negotiators have successfully hammered out an interim agreement which forestalls a further escalation, makes some progress on at least a few issues and establishes a degree of confidence and goodwill between the two governments.

Looking forward, the immediate question is whether the more difficult Phase Two discussions will be earnestly engaged right away. President Trump has announced that he will be traveling to Beijing “at a later date” to kick-off phase two, but China has been considerably more circumspect about the status of the next round of negotiations. With US Presidential politics heating up, we can’t rule out the possibility that one or both countries will opt to “slow walk” the negotiating process until after the political dust settles.

New developments, positive atmospherics

There’s also been a couple of interesting new developments to take note of: The US and China announced last week the resumption of twice yearly talks on trade and economic issues. In one form or another, these talks were an ongoing feature of both the Bush and Obama Administrations.

The previous rounds of consultations ultimately came to be seen by many trade hawks in Washington as emblematic of everything that was wrong with the US approach to China: endless talks and consultations which yielded plenty of assurances from China but few if any concrete actions. The Trump Administration promptly dropped these talks and opted instead for a more confrontational approach of punitive tariffs aimed at pushing China to take remedial actions which previous rounds of consultation had failed to produce. In essence, the Trump Administration approach was a renunciation of the consultation-oriented approach of its predecessors.

It’s unclear thus far how to interpret this reversion to the previous way of doing business. Is it a way to slow-track talks on tough issues while creating the appearance of activity? Or is there reason to believe that things have sufficiently changed and that a reinvigorated framework for consultation will yield concrete results that previous attempts failed at?