China Power | Diplomacy | Economy | East Asia

The Phase One Trade Deal: What’s in It for China?

Looking at the text, China’s commitments far outweigh the United States’. So why did Beijing sign on?

By Fatih Oktay for
The Phase One Trade Deal: What’s in It for China?

President Donald J. Trump participates in a signing ceremony of an agreement between the United States and China with Chinese Vice Premier Liu He in the East Room of the White House, Jan. 15, 2020.

Credit: Official White House Photo by D. Myles Cullen

The 80 pages of the main body of the “Phase One” agreement signed on Wednesday are packed with commitments by China but it is hard to find any from the United States. So why did China agree to this deal?

The bulk of China’s commitments are on “expanding trade” and take up more than a quarter of the agreement text. According to these, China is to buy goods and services from the United States worth at least $77 billion more in 2020, and $123 billion more in 2021, than it did in 2017, the peak year of U.S. exports to China. According to U.S. figures, the dollar value of U.S. exports of goods and services to China was about $190 billion in 2017 (and will likely be around $170 billion in 2019). So, according to the agreement, the dollar value of China’s imports from the United States should reach about $270 billion in 2020, and $310 billion in 2021. That means an increase of about 60 percent this year and an additional 15 percent the next year in Chinese imports of U.S. goods and services. China’s job is likely tougher than these percentages indicate because the increases are to come from specific goods and services listed in an annex.

In addition to what and how much, China has commitments related to how it buys. More than another quarter of the agreement text is dedicated to China’s commitments on regulatory changes to facilitate increased trade in agricultural products, including genetically modified ones. Accordingly, China commits to change its rules and regulations on topics such as the equivalence of U.S. food safety systems and certificates to the Chinese ones; streamlining of product registration, approval, and customs clearance procedures; specialization of auditing procedures for U.S. suppliers; adaptation of a U.S. automation system for accessing export certificates; maximum pesticide residue limits for agricultural products; and procedures for the establishment of sanitary and phytosanitary measures. There are also product-specific commitments such as eliminating cattle age requirement on beef products imported from the United States

China does not have such heavy commitments in some other areas the agreement covers. On exchange rate policy, there isn’t much beyond what China is already doing or had committed to do before the agreement. On access to the financial services market, many of the commitments are related to changes already in progress or those China had declared an intention or plan to implement, though there are some new commitments such as implementing strictly defined processes for evaluating the applications of U.S. electronic payment service providers.

China’s commitments on IP protection, even though broadly in line with intentions and plans already declared and changes implemented in recent years, will likely require a lot of changes in laws, regulations, and government practices. And very significantly, according to the agreement within 30 days China commits to providing the United States with an action plan that includes measures that it will take to implement its obligations related to IP protection and the date by which these measures will go into effect.

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In contrast to China’s heavy load of commitments, the United States does not have commitments in the agreement that go beyond continuing to do what it is already doing — except for a limited number of insignificant promises like “completing the regulatory notice process for imports of Chinese fragrant pear.”

So why did China enter this deal? What is in it for China?

Although not part of the agreement, it is understood that the Trump administration cancelled the implementation of a 15 percent tariff raise, scheduled to take effect in December 2019, on a list of Chinese exports worth $160 billion, and is going to reduce by half the 15 percent raise on $110 billion worth of Chinese goods that went into effect in September. But these latest tariff hikes cover the goods where the United States is most dependent on China; apparently China supplies at least 75 percent of U.S. imports for the goods covered in the $160 billion list. So it is highly doubtful that the Trump administration could have afforded to sustain these hikes. On the other hand, almost all studies on the subject show that the tariff rises have a negative impact on the U.S. economy, so further tariff rises for China were not likely either, especially in an election year.

In any case, it is not clear how big of an impact the tariff hikes are having on the Chinese economy. The direct impact is definitely not large. The domestic value added in exports to the United States makes up less than 3 percent of the Chinese GDP. Even big variations in this 3 percent can be easily accommodated by monetary and fiscal policies. However there is also the expectations element: the tariff war is impacting expectations, and hence investment spending, negatively and the Chinese economic leadership doesn’t seem to be particularly skillful in managing these expectations. This may be part of the answer: Its potential impact on expectations – and hence investment expenditures — might have made the deal attractive for China.

Even though there is no such commitment in the agreement, in an election year the deal will naturally make the Trump administration go softer on China in other areas of contention like technology and industrial policies, as the Trump administration will be careful not to risk the support of rural voters made happy by increased Chinese purchases. This maybe another attraction of the deal for China.

However, these considerations only provide breathing space for China. After the election, if Trump wins, he is likely to bring back into spotlight the more important issue of state involvement in the economy and technological development in China, and intensify the technology war. If Trump does not win, it is likely to be worse for China. Another president that can leverage the United States’ soft strengths and cooperate with allies could make life much harder for China. So, either way the conflict is likely to intensify after the U.S. elections. It is unlikely that Chinese leadership would go into this deal just for a short period of relief.

The deal, though, may have long term effects on the relationship of the two countries as well. U.S. exports of goods and services to Canada and Mexico, its top two markets, totaled about $365 and $300 billion dollars respectively in 2018. The trade expansion required by the deal will place China’s imports of U.S. goods at a level comparable to that of Mexico by the end of next year, and if the trend continues, with the expected rates of its economic growth, China may soon be the top market for U.S. exports. That would be strong coupling in a time of decoupling discussions and would make the United States a stakeholder in the Chinese economy. The other side of the coin: China’s leverage on the United States would increase immensely.

The deal may have another medium-term effect: It may help Donald Trump weather the impeachment storm and win the coming election. As he is likely to be viewed as the best of the bad options for China, this maybe one of the strongest attractions of the deal for China.

Fatih Oktay teaches Chinese economy and politics at Koc University, Turkey and is the author of a widely acclaimed book, China: Rise of a New World Power and Changing Global Balances in Turkish. Follow him on Twitter @Fatih_Oktay_ENG