Phase 1 of U.S./China Trade Accord: More Questions Than Answers

Posted on 10/13/2019 1:18 PM

Farmers, traders, others as usual want details that are lacking on purchases

Some U.S. media are trying to characterize which country won the multiple-phase U.S./China talks, with Phase 1 completed pending getting the accord being written in three to five weeks. While China got President Donald Trump to postpone slated Oct. 15 tariffs on $250 billion of Chinese products, with no decision yet on the new Dec. 15 tariffs on around $160 billion of Chinese products, the U.S. garnered a big Chinese shopping list of $40 billion to $50 billion of U.S. farm products over what appears to be around a two-year scale-up process before they go on an annual basis, at least based on U.S. officials' comments. But some are already raising the possibility that China may see the farm product purchases in a different way… thus the need to see actual language regarding this area. Some intellectual property and financial services language were part of Phase 1, along with foreign exchange matters, with “structural ag issues” also agreed to relative to SPS and other issues including biotech products from the United States. The most important topic, enforcement, saw further progress in the Phase 1 conclusion, with final features of the complex topic slated for talks ahead in China, likely before the mid-November APEC meeting in Chile where Trump and Chinese leader Xi Jinping could officially sign Phase 1 and work begins on at least one if not two more phases. All that is a definition of win-win by both countries, rather than the usual hype of some media wanting to brand one country the winner over the other. Beijing’s plan, according to some China watchers citing Chinese officials, now is to keep talking to Washington officials, while avoiding meeting all of their demands. That at least suggests the next phase or phases could go beyond 2020 U.S. elections. Still others say it is Trump's goal to extend further talks near or past Nov. 2020 elections. Finally, if you read Chinese media, as detailed in the dispatch below, one gets a far different assessment of what occurred during the most recent talks, and what may be ahead.


— Update on U.S./China trade agreement/talks:

  • Phase I talks are completed and will now take three to five weeks to put the details on paper. Key provisions cover intellectual property, financial services and agriculture.
  • A potential signing ceremony for the mini deal Phase 1 could take place on the sidelines of the Nov. 16-17 APEC meeting in Chile. If so, the accord would be signed by President Donald Trump and Chinese leader Xi Jinping.
  • China has asked U.S. negotiators to China ahead of the potential APEC-based signing ceremony.
  • Phase 2 talks will begin when Phase 1 is completed, Trump administration officials noted. Progress was also made on “technology transfer” in Phase 1 of the agreement, Trump noted, with further discussions on that topic in coming Phase 2, which Trump said “will start negotiations almost immediately after we have concluded phase one and papered it.” Analysts think other issues like China’s subsidies to state-owned firms would fall coming phases.
  • Phase 1 includes a Chinese commitment to purchase $40 billion to $50 billion of U.S. farm products, apparently over two years, and then on an annual basis, with the beginning date of those purchases not yet confirmed, nor has a commodity list been revealed. Treasury Secretary Steve Mnuchin that the purchases “would scale up to an annual figure,” which he said would be reached “within the second year,” to which President Trump added would be the result in “less than two years.”
  • No commodity purchase details other than conjecture by some, including farm groups who wish their commodity is on the Chinese purchase list. If achieved annually, that would be substantially above levels near $21 billion that prevailed in 2017 before the trade war and then were subsequently reduced by China as tensions mounted.
  • China hasn’t provided details of the negotiations, including that it will buy $40 billion to $50 billion of U.S. farm products. Beijing officials still insist that agriculture purchases must align with the real needs of Chinese companies, including state-owned enterprises, and comply with World Trade Organization (WTO) standards which limit market-distorting practices. Chinese negotiators have said China shouldn’t be forced to divert purchases from other countries such as Brazil to meet the U.S. request. Beijing’s position at least raises the possibility for disagreement over the size and timing of Chinese purchases, and whether the $40 billion to $50 billion number is an aspiration or a firm target. China’s state media and Ministry of Commerce made no comments on agricultural purchase commitments after the meetings.
  • President Trump touted the ag purchases in a tweet Saturday. “The deal I just made with China is, by far, the greatest and biggest deal ever made for our Great Patriot Farmers in the history of our Country,” he said. “In fact, there is a question as to whether or not this much product can be produced? Our farmers will figure it out. Thank you China!”
  • Phase 1 also addresses what officials labeled “agricultural structural issues.” That includes sanitary and phytosanitary (SPS) language and provisions on biotechnology, apparently a reference to getting U.S. biotech products approved and used in China. U.S. Trade Representative Robert Lighthizer said “probably at least as important as the purchases is the fact that we have corrected a variety of SPS — what we call sanitary and phytosanitary issues,” he observed. “And we have corrected biotechnology issues. And it will be — it will be much easier now for American farmers to be able to ship to China. And we have made some corrections on our side to — that will help them on the Chinese side.”
  • On foreign currency exchange issues, Mnuchin stated there were “good discussions” during the talks with People’s Bank of China Governor Yi Gang. “We have also had extensive discussion on financial services, opening up their markets to our financial services firms. So we have pretty much almost a complete agreement on both those issues.” More talks and language on those topics will be part of a Phase 2 process.
  • Asked if the U.S. would remove its designation of China being a currency manipulator, Mnuchin replied the U.S. would be making a decision on that. “Although I would comment that, assuming we close the agreement and we have the assurances, that will be a big step in the right direction for our evaluation,” he observed.
  • Trump comments. The president during a Friday press briefing in the Oval Office said that “banks and all of the financial services companies will be very, very happy with what we have been able to get. And I think China is going to be very happy because they will be served very well by these great institutions being able to go into China. And it is going to be a tremendous thing for banks and for financial service companies.”
  • Why phases? Beyond Phase 1 of the process, Trump noted there would be phase two and potentially even phase three. Overall, he stated, “it is something that we both realized right from the beginning is very important — not only for China and not only for the U.S., but for the world.” Trump had made clear repeatedly in the last several weeks that the U.S. was not looking to make a partial deal with China. Asked what prompted this apparent shift in Trump’s view, he replied, “Because it is such a big deal and it covers so much territory that doing it in sections and phases is, I think, really better.” 
  • China comments. Chinese Vice Premier Liu He also welcomed the progress the two sides have made. “We very much agree that to get the China/U.S. economic relationship right, it is something that is good for China, for the United States, and for the whole world, and we are making a lot of progress towards a positive direction.” Beijing’s plan, according to some China watchers citing Chinese officials, now is to keep talking to Washington officials, while avoiding meeting all of their demands. That at least suggests the next phase or phases could go beyond 2020 U.S. elections. The official China statement and the main state media didn’t refer to the outcome of the meetings between Vice Premier Liu He, Lighthizer and Mnuchin in Washington as a “deal” at all. China’s Ministry of Commerce merely said that “the two sides have made substantial progress” in a number of areas and “agreed to work together in the direction of a final agreement.” The statement didn’t mention the U.S. promise not to raise tariffs on Tuesday or the U.S. claim that China promised to buy $40 billion to $50 billion worth of agricultural goods over two years.
  • China media comments. The state-run Xinhua news agency referred to the “rational and pragmatic” progress in the latest trade talks but again didn’t mention a deal or any specific steps by either side. A later commentary said that while the two sides had avoided escalating their dispute, “many of the issues that follow are still full of uncertainty” and said China “must always maintain sufficient patience and strategic strength.” The final outcome of U.S./China talks depends on “whether the U.S. can walk together with China, and create the necessary conditions to push ahead,” the People’s Daily said. “People believe that only by removing all the levied tariffs to seek a true trade war truce, taking constructive moves to seek trade balance and seeking a ‘maximum common divisor’ for common interests, can trade and economic problems be resolved,” it said.
         “Talking while fighting could become the norm, and we should adapt to the norm as soon as possible,” said Taoran Notes. China’s Communist Party mouthpiece People’s Daily as most expected took a more muted tone in its reporting of the talks, saying Beijing had defended its core interests and would never trade in its principles.
         Taoran Notes, a social media account run by the official Economic Daily, took a more cautionary tone, saying that while the negotiators had made efforts to make progress they should not be “overly optimistic” about the prospects for future negotiations. “Merely saying optimistic or pessimistic is not enough to depict the current, complicated situation,” it said. The economic and trade frictions between Beijing and Washington had not fundamentally improved as the U.S. had not removed its tariffs on Chinese goods and China’s countermeasures were still in place, it said.
         Hu Xijin, editor in chief of Chinese tabloid Global Times, said the tone of the state media reports was not unusual. “The official reports didn’t mention that President Trump hopes to sign the deal next month,” he said on Twitter. “This shows Beijing is concerned about the [remaining] uncertainty and doesn’t want to raise the public’s expectations.” Chinese people had low expectations of a real breakthrough in the talks, and doubted the Trump administration would honor its commitments, he said.  “[But] of course, the final outcome will depend on whether the U.S. can walk together with China, and create the necessary and sufficient conditions to push ahead.”
  • What did China get in mini agreement? The U.S. will not implement increases in tariffs on Chinese imports that were to take place Oct. 15, officials said, tariffs that were to rise to 30%, from 25% currently. As for the tariffs that the U.S. plans to put in place Dec. 15, Lighthizer indicated those are still currently planned to go into effect. “The president has not made a final decision on that,” he added, “but there is plenty of time to make that decision.” And the way the current plan is laid out, a decision on those tariffs will come “well in advance of that date.”
  • Key topic for Phase 2 and Perhaps Phase 3: enforcement, a major focus for the U.S./China negotiations. Lighthizer noted there would be “a very elaborate consultation process. We have an escalation in various areas so that difficulties can be resolved. Both parties have allocated — or have assigned various people; have created a structure under it.” What remains on that component, Lighthizer explained, are “the final details of what will happen if there is not a resolution.  And that is, kind of, the final issue that we are putting together. But both sides agree it absolutely has to have it… a workable dispute settlement mechanism.  And we are very close to that.”
  • Huawei not part of talks and is on separate track. Asked if the situation with China’s Huawei was part of the process, Lighthizer said, “In this agreement, we are not dealing specifically with Huawei. It is not part of this agreement. That is a separate process.”
  • Will Phase 1 and other phases be implemented? Given the history of prior negotiations which saw China negotiations seeing progress only to be replaced by confrontation and escalation, Trump was asked about assurances that this phase one portion of the deal will not fall apart. “That can happen,” he said. “I do not think it will.” He concluded that while it is a possibility the agreement may fall apart, “I think the likelihood of it falling apart is not so good.”
  • President Trump played down democracy protests in Hong Kong, claiming it was drawing fewer protesters and that the problem would solve itself. Analysts said this was another win for Beijing, which has been worried about Washington bringing in nontrade related issues into the talks.
  • Perspective: As usual, the U.S. ag industry wants details that at least have either not been made, or are open to translating the Phase 1 agreement into words or needs further interaction with China relative to their coming shopping list and the timing and start-date of the buys. As Trump admitted, the deal could fall apart, a risk that was seen last May when a near-agreement caved. But for now, both sides may be headed toward a resolution in what is being seen as a win-win situation for both countries and that is a requirement for any successful trade accord conclusion.


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