The phase-one deal de-escalates the trade war but uncertainty remains

The US and China’s negotiation on the phase-one deal finally pays off in the middle of January. The interim deal is positive as it allows for China and the US to have a truce of the trade war, which could have become more costly for both sides. While most details of the deal have already been expected, it still brings optimisms to the market. By 15 January 2020, the CNY had quickly appreciated towards 6.89 against the USD, and the Shanghai Composite Index had moved up to 3,090.

As expected, the deal has a long list of Chinese imports from the US with the total value up to $200 billion, covering energy, agricultural, manufacturing goods and services. The additional purchase will increase the value of Chinese goods (excluding services) imported from the US by 139% in the next two years compared with the official statistics offered by China in 2019. However, there is only weak promise on increasing Chinese imports from the US after 2021. 

China also continues to show its wiliness to open financial market, but many changes mentioned in the deal have already existed in the earlier announcements. There is also a chapter on exchange rate, with China agreeing to increase transparency of currency intervention measures by regularly disclosing foreign exchange reserves data and forward positions.

As for the longstanding structural issues, the deal includes two chapters on intellectual property protection and technology transfer, with measures aiming to lower the cost of initiating an intellectual property investigation. Specially, the responsibility of proof is largely shifted to the accused party. Also, China agrees not to use of industrial plans to support China’s outbound FDI aiming at acquiring foreign technology, and not to require or pressure technology transfer in relations to investment transactions. However, the deal does not address the other key structural concerns such as government subsidies and the state-owned enterprises, which are left to future negotiations.

As such, the phase-one deal is only an interim agreement between China and the US. In fact, to push for negotiation in the next stage, the US will keep existing tariffs on imports from China unless the two countries manage to reach a phase-two deal. In the bilateral evaluation and dispute resolution chapter, the agreement also makes it clear that, if the concerns cannot be resolved, the two parties hold the right to suspend an obligation, adopt a remedial measure, or in the worst case, withdraw from the agreement.

All in all, the phase-one deal shows the US and China’s shared interests in resolving the current stand-off. But it still does not address some fundamental conflicts between the two countries, such as the government subsidies and the role of state-owned enterprises (SOEs). This inevitably casts uncertainty over the future negotiations. 

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