China: Questioning some Commitments

Published on January 16, 2020

China’s Vice Premier Liu He hailed the phase-one trade agreement that was signed yesterday in a grand ceremony at the White House with US Donald Trump for having respected China’s bottom lines, “in a spirit of mutual respect and understanding.”

And with that signing, the Chinese leadership welcomed the truce and the de-escalation in trade tensions it will hopefully presage with the US with open arms.

*** But while Beijing welcomes the cease fire, the decision not to send Vice Premier Liu He to Washington with the title of Special Envoy from President Xi Jinping was deliberately intended to downplay, even if for domestic consumption purposes, the significance China attaches to the agreement, and to stress a narrative that the rush to a signing deal came from the White House, and not from Beijing. ***

*** Far more importantly, with the ink barely dry on the deal, very senior officials in Beijing are already conveying their belief that it will be “absolutely impossible” for China to increase its imports from the US by $100 billion in 2020 over the 2017 baseline numbers, to over $270 billion, as explicitly outlined in the accord. ***

*** From what we understand, that skepticism is fueled by numbers run by China’s Ministry of Commerce. Those forecasts estimate that imports from the US would rise, “at most,” we are told, to $220 billion in 2020. ***

Chinese officials believe the deal will nevertheless accrue significant benefits to the Chinese economy, mostly front-loaded into the first half of 2020.

As to the when and where of a phase-two agreement, they believe that will come before the November US presidential elections only if the US economy stumbles in a significant way, and so the likelihood, barring that, is that existing tariffs on China will remain in place.

Sensitivity to EU and WTO

Beijing will phrase its meticulously scheduled commitments to buy large quantities of US products, especially agricultural goods, not as a promise that it will do so, but that it will give American companies, especially its financial institutions, the same opportunities to enter Chinese markets as it gives other foreign companies.

This rather less committal turn of phrase, which is going to be tricky to convey to US officials or to the broader financial media, will play well to China’s domestic audience. Importantly, as phrased it would also evade WTO-related concerns from other trading partners (such as Brazil regarding agricultural sales) about a bilateral deal between the two economic powers that will put them at a competitive disadvantage vis a vis the United States.

Indeed, just today the new and outspoken European Commissioner for Trade, Phil Hogan, questioned whether the China-US trade deal may run afoul of WTO rules. We believe the answer is yes, but that the likelihood of any consequences arising from that is negligible, especially as the EU positions for its own clash with the US over trade, airplane subsidies, and most importantly, digital taxation.

Frontloaded Benefits

Of course, that said, the phase-one agreement is a big boost for both economies.

Lest that message be lost, Chinese officials note the phase-one trade agreement “is beneficial to the fundamental interests of the Chinese and American peoples, and to the people of the world,” and “is conducive to enhancing global market confidence, stabilizing market expectations, and creating a good environment for normal economic, trade and investment activities – in the context of the current downward pressures on the global economy.”

Having said that, expectations in Beijing are that most of the benefits from the just concluded deal will be front-loaded in the first half of 2020, as both sides look to deliver on enhanced bilateral trade promises.

Sino-US economic relations, they expect, will then weaken in the second half of 2020, which, not coincidentally covers the US November Presidential elections.

Skepticism over Further Tariff Relief

Clearly, the signing of a phase-two deal will be difficult, especially given, as we have written on numerous occasions, that a dispute over subsidies to China’s state-owned industries, which would be the main component of this next phase, is not one Beijing is willing to even contemplate.

With the US political calendar in mind, sources in Beijing remain highly skeptical that a phase-two will or can be signed in October, before the November 2020 elections.

Indeed, Chinese officials believe any push from the US on phase-two will be driven entirely by US economic conditions: if the economy is to decline significantly they see Trump pushing for a phase-two, October boost, if not, they see a possibility the US will “continue its trade war” with China.

We assume that “continued trade war” to mean an expectation the existing tariffs would then remain in place.

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