Phase One U.S.-China Trade Deal: Getting Three Things Right

Wendy Cutler op-ed for The South China Morning Post

shipping bird eye

(Tom Fisk/Pexels)

The following is the full text of ASPI Vice President Wendy Cutler's op-ed originally published by the South China Morning Post.

Although the formal text of the U.S.-China phase one trade agreement has yet to be released or signed, observers haven’t wasted a minute sharing their views. By far, the most controversial part has been the tariffs.

Some believe the agreement was not worth the harm and uncertainty caused by the tariffs – many of which will remain in place, at  considerable cost to U.S. businesses, workers and consumers.

Others say the escalating tariffs were instrumental in bringing the 18-month dispute to a successful partial conclusion. The tariffs certainly played a role, but three other factors were critical.

First, in the final stages of the trade talks, the United States made important compromises. Usually, to get to the finish line in a trade negotiation, each side must balance its priorities and concerns against those of the other. But this dynamic wasn’t apparent in the months following the relaunch of the talks in December last year.

The U.S. insisted on its long list of priorities, and when China didn’t oblige and instead retaliated with tariffs of its own, U.S. tariffs were raised, one tranche after another.

However, this seemed to change in recent months, as the intensifying tariff war inflicted more pain on both sides. Only then did give and take seem to start in earnest.

Where were compromises made? A critical priority for President Donald Trump was securing a Chinese commitment to buy lots more American goods and services.

Recognising this, China had no option but to play ball. But, in return for a substantial purchasing commitment, it sought conditions that it would make purchases based on market conditions, and in line with World Trade Organisation commitments.

The U.S. agreed to this escape valve, even though it appears to weaken the commitment. It also demanded that chapters on intellectual property protection and forced technology transfer be included. China agreed, but its actual commitments, while meaningful, fall far short of what the U.S. initially requested.

China also expected its concerns and red lines to be respected. While we have yet to see the 86-page agreement, it seems the U.S. dropped its request to embed references to Chinese legislation in the text. This issue had led to the breakdown of the talks last spring.

China also made it clear it needed a rollback of the U.S. tariffs already in place, and while it did not get as much as it sought, the tariffs imposed on U.S.$120 billion of Chinese imports in September were halved.

Beijing also apparently succeeded in achieving some balance in the text, including preserving its right to take proportional action should Washington violate its obligations.

Second, the U.S. backed away from its insistence on reaching a comprehensive agreement, settling instead for a partial deal.

Furthermore, it has indicated that multiple phases of negotiations may follow. In an interview that aired on Face the Nation on December 15, U.S. Trade Representative Robert Lighthizer even admitted that resolving differences with China “is going to take years”.

By being more realistic about what was achievable in the short term, while recognising that we all live to fight another day, the way was paved for a successful phase one deal – although, as noted, the deal still leaves in place many tariffs.

Third, personal relationships matter in trade negotiations. Building trust and respect with one’s counterpart can help bring a deal home. That kind of relationship can allow one to informally explore options for some of the thorniest issues and discuss possible trade-offs.

Of course, at the end of the day, each negotiator is focused like a laser on achieving their own national goals, but that alone will not get them over the finish line.

A photo appeared in the media last spring of Lighthizer greeting Liu He, his Chinese counterpart, at the entrance of the Winder building that houses the office of the U.S. Trade Representative with a welcoming expression. Of course, this might have been for the cameras but the warmth seemed genuine.

The strong working relationship that the two negotiators developed not only contributed to the materialisation of the phase one deal but should help head off potential problems in the lead-up to the signing and signature and implementation of the agreement.

Compromise, pragmatism and relationship-building have been evident not only in the U.S.-China trade talks, but also in the U.S. recent negotiations with Mexico and Canada, and the USTR’s negotiations with Congress on the United States-Mexico-Canada Agreement.

These are not usually considered hallmarks of the Trump administration’s negotiating style. But, as was learned along the way, bravado and table-pounding don’t get you over the finish line in trade negotiations.

Read the full article on South China Morning Post.