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Impasse over Phase One Continues

11/19/2019

To determine progress on concluding a Phase-1 trade agreement between the U.S. and China it is necessary to weigh the conflicting comments from both the White House and Beijing. Since the conclusion of the October 10/11th negotiations in Washington the White House has projected optimism over rapid conclusion of a Phase-1 agreement noting that details not released following the bilateral discussions, only required “papering”. It was the intent of the U.S to sign the “agreement” during the Asian-Pacific Cooperation Summit in Santiago in mid-November.  In the event, unrest in Chile resulted in cancelation of the agreement. It is doubtful in retrospect that an agreement would have been signed at this time. There is evidently an impasse over rescission of tariffs and reluctance by China to concede on structural issues.  As yet, neither venue nor date has been set for signing of any agreement and China recently invited U.S. negotiators to Beijing to continue talks.

 

It is instructive to review comments by Gao Feng who has emerged as an important spokesperson reflecting the position of China on the trade dispute.  It appears that rescission of tariffs will be a prerequisite for China accepting any partial agreement.  Gao stated, “The trade war was begun with adding tariffs and should be ended by canceling these additional tariffs.  This is an important condition for both sides to reach an agreement.”  He added, “If both sides reach a Phase-1 agreement the level of tariff rollback will fully reflect the importance of this agreement.”  

 

In contrast Larry Kudlow, White House Economic Advisor commented at a Council on Foreign Relations meeting that Washington and Beijing were “close to a deal” He added “The mood music is pretty good and that has not always been so in these things” Despite obvious conflict within the Administration, Kudlow apparently based his optimism on the outcome of recent telephone discussions between U.S. Trade Representative Amb. Robert Lighthizer in consultation with Treasury Secretary Steven Mnuchin with their counterparts in China led by Vice Premier Liu He.

 

On Friday November 8th November, the President categorically stated that he had not agreed to remove tariffs on imports from China.  This is consistent with the belief that tariffs provide the leverage to induce China to make structural changes that were the genesis of the dispute in 2017.  The Department of Commerce specifically emphasizes reluctance of China to commit to importation of agricultural commodities.  After the October discussions, the President quoted  that purchases of $40 to 50 million would be made although this was subsequently denied by China.

 

The Administration points to the more than $5 billion monthly in tariffs accruing to the Treasury.  On the distaff side, over $28 billion will be disbursed to farmers over two years to compensate in part for losses associated with sharply lower prices for agriculture commodities including soybeans, corn, sorghum, fruit and nuts.  Recently China announced increased imports of U.S. pork and lifted the embargo on poultry.  This is less a concession to the trade dispute than a reflection of basic need given the reduction and availability of domestic pork as a result of African swine fever which may have resulted in the death of up to 40 percent of the national herd.

 

China is playing a long game. They have no intention of abandoning past practices including neglect of intellectual property rights, coercive joint-venture practices and state support for industrial enterprises. These strategies are pivotal to achieving the “Made in China 2015” initiative. To make meaningful concessions at this time would be detrimental to growth that is lagging and would be a manifestation of loss of “face” It is also evident that China is keenly aware of political considerations in the U.S. and consider that they can, through prolongation of the trade dispute, influence the 2020 election to their advantage. 

 

Farmers, manufacturers and investors need clarity on the state of negations and above all a phased resolution of the dispute leading to restoration of trade for the mutual benefit of both nations and the world economy.