How Big a Deal is the New U.S.-China Trade Deal?

The U.S.-China trade deal concluded last week under the Comprehensive Economic Partnership represents a step forward. It appears to resolve a few long, outstanding issues of friction in our bilateral relationship, including reopening the Chinese market to U.S. beef imports and implementing the WTO dispute settlement finding on electronic payment systems. I deliberately use the word “appears,” because it calls for more technical work on beef, which could delay the reopening, and the terms for the deal on electronic payments are vague.

Both issues were teed up by the Obama Administration and were ripe for resolution. Now, the hard work begins. This will involve addressing the underlying issues of concern, which include overcapacity, subsidization, state-owned enterprises, and investment restrictions. These issues don’t lend themselves to quick fixes nor to being checked off a list. Addressing them will require patience, detailed discussions, political will, and creative solutions that will endure over time. Resolution of these issues will also benefit from consultations with our other trading partners, many of whom share U.S. concerns.

The deal also includes a number of elements that the U.S. will deliver for China, including the lifting of restrictions on poultry imports, access to U.S. natural gas exports, and One Belt, One Road summit participation. There is no doubt that China will continue to insist on additional U.S. measures in return for each step of the way in this process. I fear that the U.S. side may have given away too much in this first tranche of deliverables and secured too little in an effort to trigger early momentum in this process.

The recent trade deal between China and the United States, though indeed a modest “early harvest” by some measures, helps to brighten the prospect of overall bilateral ties between the two countries.

The most significant message from the deal, announced right on the eve of China hosting its One Belt, One Road summit in Beijing, is one of convergence with a “results-oriented” approach to handling economic relationships between the two countries. Both Beijing and Washington came up with their respective wish lists, used them to find areas of convergence, and came up with deliverables. Not perfect. But each have gained something.

This stands in good contrast with the “us vs. them” posture most visible during the second Obama Administration. Beijing and Washington cast each other on opposite sides when it came to negotiation of trade rules (the Trans-Pacific Partnership) and management of international finance for development (the Asian Infrastructure Investment Bank). Sure, as members of the World Trade Organization (WTO), China and the United States use the WTO as the lowest common denominator to relate to each other anyway. Still, business actors in both countries and beyond do pay attention to the shifts in diplomatic mood.

Moving forward, it will be useful for the Chinese side to make good use of the goodwill extended from the White House openly endorsing the One Belt, One Road initiative. China should encourage the U.S. to work together in fostering trade with and investment in third-country markets, as it did with a number of European governments including Britain and France.

A more pertinent means of reciprocating the Trump White House’s gesture of goodwill is to be more proactive in negotiating the next batch of trade deals, during but certainly not stopping at the end of the 100-day period. Increase in imports from the United States is, fundamentally speaking, in China’s own interest. For instance, more and more Chinese travel to the United States for healthcare, which involves spending money earned in China. Would it not be a net gain for more and more quality healthcare services from the U.S. to be allowed to operate in China?

As for the Trump Administration, it would be well advised to revisit the Obama Administration’s refusal to grant China “market economy status” (MES) under the WTO. Alas, China, without having to boast about it, has by and large internalized costs that came along with the current state of affairs. The longer the MES issue drags on, the greater leverage it gives those Chinese who resist calls for cooperation by claiming that the U.S. and its allies keep moving signposts.

The first deals under the Sino-U.S. 100-day Action Plan look like a step in the right direction and a positive signal for future bilateral trade talks. At least there won’t be an immediate trade war between the world’s two largest economies. The Trump administration hailed the agreements as the first step in redefining the Sino-U.S. trade relationship. However, the deals contain almost no substantive progress on key issues. Most of Beijing’s promises are in line with China’s existing international commitments. For instance, by promising to open its market to foreign credit card companies, China is simply complying with a 2012 World Trade Organization (WTO) ruling against Beijing’s discriminatory measures. Similarly, the decision to lift the embargo on beef imports into China can be traced back to a 2013 WTO ruling.

More importantly, both sides have for now set aside more fundamental differences. Neither side has so far touched upon tricky issues that involve their respective core values. Take credit card services: Under China’s restrictive information law, it will be extremely difficult for foreign credit card companies to access valuable customer data that are key to their profits. Restricting access to such information could be seen as another example of China’s discriminatory trade measures against foreign companies. Yet the underlying reason is China’s domestic policy of controlling the free flow of information.

Conflicts over core tenets such as information control could easily hamper future trade talks even though the Trump administration has different priorities than its predecessor. Under President Obama, the free flow of information became a cornerstone of the Trans-Pacific Partnership (TPP). Yet President Trump withdrew from TPP earlier this year and left in limbo the remaining 11 countries of the trade pact.

Different priorities could also explain why the Trump administration agreed to send a delegation to the One Belt, One Road forum in Beijing last weekend. Obama had never endorsed Xi Jinping’s signature foreign policy project and viewed it as almost a rival to TPP. Trump, however, appears to take a more “pragmatic” approach, casting aside the value-based TPP and dispatching an American team to the forum in Beijing.

Trump’s move can be seen as a quiet endorsement of Xi’s project and as an acknowledgement of China’s new role in international trade. But whether Beijing is willing and capable of taking on that role remains to be seen. The credibility of China’s leadership role in the One Belt, One Road project rests so far merely on Beijing’s financial power to invest in the Silk Road regions. Yet true global leadership is more than having deep pockets.

China’s stance in the last few decades on denying market access—sometimes due to political considerations—to some foreign products, companies, and entire industries has been an important reason why negotiations on the Information Technology Agreement at the WTO were difficult, to say the least. Those challenges have not gone away and have dominated Sino-American trade talks for many years. All future negotiations with China will yet again have to address key questions of market access, transparency, and the free flow of goods and information. Otherwise, trade talks will not succeed—no matter how many “deals” on beef imports or credit card services are reached in the meantime.

Donald Trump’s “early Harvest” trade deal focuses on U.S. commodity exports to China and has vague language about financial services. What it needed to go half way toward addressing imbalances was to impose significant hurdles for Chinese manufactured goods selling to the U.S. market until China provides real market access for U.S. financial services. That is tough because of the structural barriers in the Chinese financial markets, but otherwise, why bother? The U.S. gained precisely nothing it had not had before. China gained a bit more access and a lot of face.

First off, the pact does nothing to address the biggest imbalance in bilateral trade. China is a massive net exporter of manufactured goods, and U.S. industries have a legitimate concern that many of those goods are underwritten by China’s massive program of subsidies to the industrial economy.

Access for U.S. beef to the Chinese market is welcome, but that deal was done last September. On the financial services side, China simply reiterated filmy commitments on foreign credit cards and credit ratings agencies that have been made for 16 years now and never implemented. Market access is blocked by deep structural issues: the ban on foreign access to consumer data, the sub-market rates for credit card fees that are set by China’s central bank, the massive flow of non-market preferences going to incumbents such as Alipay, not to mention preferential licensing. China recently re-issued licenses for all its “third-party payments” companies, all domestic. None of this changes with the trade pact by one iota.

The deal has special emphasis on beef and natural gas. China had already agreed last September to import U.S. beef, so that piece of the deal was done by the Obama Administration. On natural gas, I am very skeptical that there will actually be change. China’s big refineries are highly vertically integrated and they are all investing heavily in coal-to-chemicals (CTC). Even though natural gas is cleaner and arguably cheaper, China has too much coal, sunk cost in squeezing oil from it, and I can’t see anyone retrofitting a refinery to use natural gas. The pact only has China making best efforts to import—it does not compel any particular volume. So call me cynical, but I don’t see anything changing there.

As for the deal’s embrace of the Belt and Road project, give me a break. China already has a soft loan program for infrastructure in developing countries that dwarfs that of the World Bank, and I have not noticed prosperity blooming in loan targets such as Venezuela. I have just noticed massive losses to China’s Development Bank. One can understand why China is desperate to generate more external demand for its own steel and engineering services, but there’s no need for the rest of us to compete for bad projects in a non-transparent process run by China. We have plenty of multilateral institutions that are working just fine.

So what did the U.S. gain compared with where it was in January? A big, fat zero. What did China gain? More exports to the U.S. and the critical currency for Xi Jinping: face. The U.S. sent a delegation to the Belt and Road summit in Beijing. It’s all about theater and, in this act, China is the star.