Trump announces ‘Phase 1’ deal with China, but comprehensive solution still looks far off

From left, China's President Xi Jinping and U.S. President Donald Trump shake hands on November 9, 2017, during a meeting outside the Great Hall of the People in Beijing. (Artyom Ivanov/Tass/Abaca Press/TNS)
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By Don Lee Los Angeles Times (TNS)

WASHINGTON — After a resumption of high-level trade talks in Washington, President Donald Trump announced Friday that the Chinese would buy more U.S. farm goods and take some other steps in what he called a “Phase 1” deal between the two largest economies in the world.

In exchange, Trump agreed to put off new tariff hikes on imports from China that were set to take effect Tuesday. Over the last 15 months, the president has slapped punitive taxes on more than $360 billion of imported Chinese goods. Another round is still scheduled for December.

The agreement marked progress after a breakdown in talks in May, but was far from a major breakthrough or the kind of comprehensive deal that Trump has promised in order to rebalance trade and address long-standing American concerns about China’s unfair economic practices.

Friday’s agreement could open the way for a bigger substantial deal, but it also could turn out to be another short-lived truce in Trump’s unpredictable trade war with China, punctuated by tit-for-tat tariffs.

Stock markets rallied in anticipation of an agreement, with the Dow rising more than 300 points.

Trump’s announcement came after he met at the White House with China’s top trade envoy, Liu He, who led a delegation from Beijing for two days of talks in Washington with senior administration officials.

David Loevinger, a former senior Treasury Department official on China affairs, said even a “super-skinny deal” is better than a deepening trade war. But given the off-and-on nature of Trump’s trade war with China and a widening of tensions with Beijing, especially over technology competition, he asked: “How long is it going to last?”

China’s pledge to buy more U.S. soybeans and other agricultural goods — which Trump has repeatedly called for — is something they offered to do earlier this year.

“Agreeing to import more ag products is no big concession for the Chinese,” said Loevinger, who’s now an analyst for TCW Emerging Markets Group in Los Angeles. “They have to eat, and they’re running out of pigs,” he added, referring to a staple of the Chinese diet lately threatened by an outbreak of disease.

More importantly, Beijing has given no indication that it’s prepared to give ground on key structural industrial policies and mercantilist practices that the U.S. side wants stopped, including government subsidies to state-owned enterprises and various ways in which American companies are pressured to hand over technology and trade secrets in order to access Chinese markets.

“Whatever kind of deal it is, it’s not a solution, not an answer,” said Clyde Prestowitz, president of the Economic Strategy Institute and a former trade negotiator in the Reagan administration. “It will become increasingly difficult for China and the U.S. to live together in the way we have been living together,” he said, noting that the fundamental problem is trust and the difference in values.

Derek Scissors, a China expert at the American Enterprise Institute, said that as much as Trump likes tariffs, the president had good reason to back away from imposing the new upcoming taxes on China.

Along with Tuesday’s tariffs, Trump’s planned Dec. 15 tariffs presumably would be lifted if a deal is finalized. The December one is significant as it will add 15% tariffs on some $160 billion of mostly consumer goods, including cellphones, laptops and toys — something that businesses warn will pinch American households and risk a further slowing of economic growth, which would almost certainly hurt Trump’s reelection bid.

“Nobody right now wants those tariffs,” said Scissors, who regularly talks with administration officials.

A suspension or rollback on tariffs could pave the way for further negotiations, but a comprehensive deal that Trump has said he wants appears to be a long way off. And it may not be possible at all, given that the U.S. confrontation with China has escalated far beyond trade.

Ahead of the talks this week, the Trump administration cited human rights violations in restricting visas for some Chinese officials, and it put more Chinese entities — in addition to the telecom giant Huawei — on a U.S. blacklist that would prevent prominent tech companies from buying crucial American components.

The administration also is reportedly considering a range of other measures to clamp down on China, including restricting Chinese access to U.S. capital markets and blocking American pension funds and universities from Chinese investments. Technology is a key battleground.

“The Chinese are coming more and more to the view that tariffs are really a second-order consideration in the overall economic relationship,” said Nicholas Lardy, a China economy expert at the Peterson Institute for International Economics. “I think the evidence is very clear that those people in the Trump administration that want a technology decoupling have gained the upper hand and they’re moving on every front possible to reduce the flow of U.S. technology to China.”

Trump previously has said that Huawei could be a part of the trade negotiations, and news reports in recent days have indicated that Trump was prepared to approve some licenses that would allow for nonsensitive U.S. components to be exported to Huawei.

Huawei recently rolled out its new Mate 30 mobile phones in Europe, but with the U.S. export prohibition, Google’s Android apps, including Google Play, Maps and YouTube, are not installed and won’t work on the phones.

“If you’re going after a premium handset market in Europe, but you don’t come with those apps, who’s going to spend money on a Huawei phone?” said Samm Sacks, an expert on cybersecurity policy and China’s digital economy at New America, a nonpartisan think tank.

Beijing and Chinese companies have been racing to become less dependent on foreign and particularly American companies and develop their own tech capabilities. But in some cases, that could take years.

In the meantime, Chinese businesses had been stocking up on U.S. chips and other components. Even so, Sacks said that there are limits to that. Even Huawei executives have told her, she said, “You can stockpile gear, but you can’t stockpile apps.”

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