A Phase One Deal is great for day traders but says little about the long-term US-China Relationship


Image Credit: The White House (CC licensed)


Global markets saw a significant jump in value with Wall Street hitting new highs at the news of the ‘Phase One’ trade deal signed by President Trump and Vice Premier Liu He. Beyond the news of the signing, the deal lacks the kind of substance that ‘win-win’ proponents would like to see. Yes, there is an agreement on the Chinese end to stop forced technology transfer and protect intellectual property. There is also the promise to buy 200 billion USD worth of US agricultural products but the reality is that tariffs will remain in place, and while the US administration may feel the pressure coming from US agricultural producers ease off for now, the issue of subsidies and market access remains unresolved.


Market Access


A key area of concern for the US administration and companies is to gain reciprocal access to China’s vast domestic market. This would involve China relaxing its own import restrictions on foreign goods - restrictions which ultimately nurtured the growth and development of global giants like Hai Er and Huawei. Maybe now that Chinese firms are some of the largest in the world, and companies like Huawei are real contenders in tech, greater access to the Chinese domestic market could be on the table.


Subsidies


It is important to recognise the strategic value that many states, including both the US and China, place on domestic steel production. Steel has a wide variety of uses and is a key material to construct critical infrastructure, high-tech manufacturing and the production of weapons.


Since acceding to become a member of the World Trade Organisation in 2001, China has benefited from its ‘most favoured nation’ status where US production has languished. Since then, China has utilised tariffs to protect domestic producers from foreign imports, such as in 2008 when tariffs were used coercively against US auto-manufacturers in order to compel them to source their parts locally. Today, Chinese subsidies have ensured that China is in a globally dominant position and has made ‘dumping’ steel in foreign markets a common trade practice - one which has drawn significant criticism from the US.


Considering the strategic value placed on domestic steel production it is highly unlikely that punitive tariffs will shake the Chinese resolve to continue subsidising their production at the expense of the US and other rival producers. And it is highly unlikely that the US will relax tariffs without an agreement on Chinese steel subsidies, as the ultimate goal of the current tariffs is to preserve what steel production the US has for the future. As such, the issue of subsidies will take centre stage during this second phase and the prospects of a ‘win-win’ with regards to steel production sits on shaky ground at best.


Conclusion


Any evaluation of a potential ‘Phase Two’ deal is, at this time, somewhat premature, but when one examines some of the more important strategic considerations for both states the idea that this is but one step in a new era of trade ‘win-win’ may be unduly optimistic. China may capitulate to some of the US’ demands with little to lose but when it comes to some of the foundational protectionist economic policies which China has employed to aid its exponential growth - Beijing will be unlikely to budge.


Joshua Boyd is a History teacher and a Masters of International Security Student at the University of Sydney.

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