1st Agreement in the Trade War

The agreement in principle between the United States and China to reduce their trade conflict is not as fantastic as President Donald Trump has said it is. However, the truth is, it does mark an important turning point in a trade war that has lasted two years and seriously affected global economic growth.

In principle, this agreement reduces economic and political uncertainties because it marks the beginning of a period of friendlier relations between the two leading great powers. Washington and Beijing have pledged to keep new phases of negotiation open in order to delve into the most complex outstanding disputes, which will require more time.

In any case, the beginning of the end of the trade war between the United States and China will be good for both countries and thus, good for the world economy. President Trump is especially interested in selling the agreement as fantastic because it could significantly benefit his political career by helping him win reelection to the White House next November amid the low point that is marked by the impeachment process he is facing. For Trump, it provides political reinforcement because it fulfills his promise to correct China’s unfair competition practices, because the agricultural and manufacturing sectors, an important pool of voters, will increase trade with China, and because the stock market, whose evolution is key to public confidence, should be calmer and present a better prospect during the election year.

Both the United States and China have indicated that the agreement also includes measures, not yet detailed, regarding respect for intellectual property (which should end Chinese industrial espionage), the suppression of forced technology transfers (which American companies that want to sell on the Asian market are required to do), financial services, the yuan’s exchange rate and the strengthening of trade that should be developed in the future. The agreement, however, does not specify how or when China will make the structural reforms required by the United States to eliminate public aid to its companies, which is one of the most difficult aspects for Beijing.

In reality, while we wait to see the small print, the agreement in principle involves certain concessions from the United States in exchange for commitments from China that are insufficient, according to most analysts. President Trump has been interested in highlighting, in particular, China’s commitment to increase its purchase of American products by $200 billion over the next two years from the energy, manufacturing, agricultural ($50 billion) and service sectors. In return, he said the United States would renounce the imposition of new tariffs on $160 billion of Chinese imports, which would have taken effect on Sunday, and would halve the tariffs imposed Sept. 1 on $120 billion worth of products from 15% to 7.5%.

The new phases of negotiation must rebalance the technological domain between both powers and the U.S. trade deficit with China, which exceeds $400 billion. To force compliance with the agreement and as pressure for future negotiations, Trump is keeping the 25% tariff imposed on Chinese products worth $250 billion, which include two-thirds of the country’s sales to the United States and severely punishes its companies. This greatly limits the economic impact of the agreement, although politically and strategically, it implies an advance toward commercial peace and lessens uncertainty.