TWN Info Service on WTO and Trade Issues (Oct19/11)
16 October 2019
Third World Network

US-China interim deal could set new normal for “managed trade”

Published in SUNS #8997 dated 15 October 2019

Geneva, 14 Oct (D. Ravi Kanth) – The in-principle agreement reached between the United States and China in Washington on Friday (11 October) to avert their trade war could set a new normal for “managed trade” as well as a bilateral “enforcement” mechanism for trade disputes.

Such a new normal, if established, could strike at the roots of the rules-based multilateral trading system and further undermine the World Trade Organization, a group of international leaders cautioned on 11 October.

After two days of talks that concluded on 11 October, the two sides reached the in-principle agreement.

The Chinese delegation was led by Vice Premier Liu He and included the Chinese minister of commerce Zhong Shan, the central bank governor Yi Gang, and the Vice Chairman of the National Development and Reform Commission Ning Jizhe among others.

The US delegation was led by its Trade Representative Ambassador Robert Lighthizer and Treasury Secretary Steven Mnuchin among others.

At a press conference after the talks on Friday (11 October), President Donald Trump announced the US would shelve new tariffs against Chinese goods worth $250 billion that were scheduled to go into effect on 15 October.

China, he said, would purchase between $40 billion to $50 billion worth of American farm products, particularly soybeans and pork among others, as a trade-off for the US move to freeze new additional tariffs of 5% over and above the existing 25% duties that were already imposed some time ago.

The large quantum of Chinese purchase of farm products is a huge gain for American farmers, President Trump insisted repeatedly at the press conference.

For the past 18 months, the US farmers, particularly in Iowa and other mid-western states, remained agitated over the trade war launched by their president as it had caused them a huge loss overnight.

With China having imposed tit-for-tat tariffs on American farm products as a response to the US unilateral decision to launch the trade war last year, the US soybean producers almost lost the Chinese market, according to several reports in the US and international newspapers.

To rescue the American farmers from the losses suffered in the Chinese market, the Trump administration provided farm subsidies to the tune of $12 billion to its farmers.

Several countries, including members of the Cairns Group, had expressed sharp concerns over the US subsidies at the WTO.

But the US chose to justify them as perfectly normal under its scheduled subsidy programs, trade envoys told the SUNS.

In short, China’s commitment to purchase large quantities of American farm products regardless of whether its market can bear it or not at this juncture could constitute as managed trade.

Little wonder President Trump hailed the in-principle agreement as the “greatest and biggest deal.”

“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 Council,” Trump tweeted on Saturday (12 October).

The US farmers, he insisted, would have to find new land/pastures for realizing the Chinese purchases that have dropped precipitously from $21 billion in 2017 due to the trade war.

In addition to the purchase of American farm products, the two sides reached an agreement on currency management and made substantial progress for improving China’s intellectual property provisions, President Trump claimed at the press conference.

China, however, has not publicly confirmed the large purchase of American farm products, nor other aspects of the understanding reached with the US on intellectual property and currency management.

Reports in the Chinese media merely suggested that “substantial progress” has been achieved but did not indicate the elements of the understanding reached with the US.

During the 13 rounds of talks between the two sides until now, China pressed for phase-by-phase talks instead of negotiating a comprehensive trade deal in one go to cover all issues raised by the US.

“If you’re China, you are pretty happy with the outcome,” Arthur R Kroeber, founder of Beijing-based consultancy Gavekal Dragonomics, said of the latest trade talks, according to the Wall Street Journal on 12 October.

“China’s negotiating position has always been, the longer you can extend the talks the better,” Kroeber said.

During the previous 12 rounds of talks, China had demanded that, as a confidence-building measure, the US must remove all the additional tariffs that it had imposed during the last 18 months.

However, China has now agreed to the US decision to retain the existing additional tariffs that the US had imposed on the Chinese goods.

At the press conference, the US Trade Representative Ambassador Robert Lighthizer said all existing tariffs imposed on the Chinese goods will remain without any change.

He also indicated that the proposed new tariffs on sensitive Chinese electronic and other items that are scheduled to go into effect in December will also remain on the table.

According to President Trump, a bigger trade deal with China will come in three stages over the next several months.

The in-principle agreement is largely about the immediate purchase of American goods and shelving tariffs on Chinese goods as well as the understanding reached on the currency management and the improvements in the Chinese intellectual property provisions/laws.

More complex and difficult issues involving structural changes in the Chinese trading and economic system as demanded by the US would be discussed in the second stage, Trump maintained.

The preliminary trade detente between the US and China is mutually beneficial for the time being.

The Chinese chief negotiator Liu He maintained that the trade deal will be good for global “growth, prosperity and development.”

But China has deferred the most difficult negotiations on the US demands involving sweeping changes in the Chinese intellectual property provisions, including an end to the alleged forced transfer of technology, state-owned subsidies to the Chinese hi-tech companies, and other market access barriers.

When asked whether China raised the issue of the ban on Huawei and the black-listing of 28 Chinese entities, the US Trade Representative Ambassador Lighthizer replied that they are being addressed on a separate track.

Clearly, any progress on the structural issues involving changes in the Chinese trading and economic system could hinge on what the US will do in removing the intransigent barriers it had imposed for the Chinese tech companies, especially Huawei, said a Geneva-based analyst, who asked not to be quoted.

In the face of growing restrictions that Chinese students and researchers undergo for entry into the American universities and research institutions, President Trump maintained that there will be no visa and other curbs on the entry of Chinese students into the elite American universities.

He expressed confidence that the two sides will finalize the first-phase of the trade deal by the time he meets China’s President Xi Jinping at the Asia-Pacific Economic Cooperation summit in China in mid-November.

“Well, we have a lot of work to do, but I am confident that the both sides are going to work very hard and anticipate we will be closing this,” the US treasury secretary Mnuchin said on Sunday.

Trump, who is currently facing serious electoral headwinds for his second term next year, also downplayed the Hong Kong democracy protests. He said the protests in Hong Kong have come down dramatically in recent days.

When asked about the divisive issue of the bilateral dispute-resolution mechanism sought by the US, Ambassador Lighthizer merely suggested it is still being discussed. He also indicated that there would be consultations before adjudicating the disputes at a bilateral level.

Before the latest round of talks, the USTR was reported to have insisted on a strong “enforcement” mechanism in which Washington can impose retaliatory tariffs on China whenever Beijing is found to have failed to deliver on the commitments set out in the trade agreement.

Ambassador Lighthizer, however, was not prepared to accept China’s demand for a complete phase-out of all additional tariffs that the US had imposed until now, according to several analysts.

China, on the other hand, had demanded “a cooperative agreement with equality and dignity” but not one-sided trade treaties, the Chinese chief negotiator had said in May after the collapse of the last round of talks.

China had pressed for a balanced deal that includes a two-way enforcement mechanism and elimination of all additional duties imposed since last year. It is willing to commit for sizeable quantum purchases of farm products, particularly soybeans and pork, based on what its market and international markets can bear.

In an op-ed piece in the New York Times on 11 October, three former leaders – Kevin Rudd of Australia, Helen Clark of New Zealand, and Carl Bildt of Sweden – wrote that “America has profited immensely from access to global markets since its birth” while “China, since opening up 40 years ago, has lifted millions of its people out of poverty largely through global trade.”

“A new trade agreement,” the three leaders argued, “should include strong enforcement provisions, along with strengthened WTO dispute-resolution mechanisms, to give greater confidence to both parties.”

But the two sides remain silent on whether the enforcement mechanism will have anything to do with the WTO.