Sitting in the East Room of the White House yesterday among a gaggle of US politicians, corporates and the occasional think-tanker to witness the signing of a “phase one” US-China trade deal was something of an otherworldly experience.
There was Chinese Vice-Premier Liu He – Confucian scholar-official, Harvard graduate, politburo member, China’s highest authority on public finance policy, unofficial leader of the economic reform faction, and most recently his country’s principal trade negotiator – standing patiently beside the current President of the United States for a 45-minute stream of consciousness about everything from the impeachment “hoax”, his great buddy Rupert Murdoch and his “fantastic family” to why he is a better president than George Washington, and why JPMorgan should thank him every morning before breakfast for their share price.
It was like watching Confucius politely and patiently indulge the ringmaster from Barnum and Bailey’s circus. The juxtaposition between gravitas and entertainment was stark beyond measure.
If China’s leadership elites, watching live from Beijing, saw the ceremony as some sort of metaphor of the state of the wider relationship, they would have cheerfully reached for another nip of mao-tai before happily dropping off into a very deep sleep.
Up against Trump’s America, Xi Jinping’s “China dream” seems very much alive and well as Xi contemplates a civilisational adversary not dissimilar to Nero, Caligula or even Romulus Augustus during the long decline and fall of the Roman Empire.
China, now accustomed to the eccentricities of this President, would still have seen yesterday’s performance as evidence of America adrift, if not a little unhinged.
But back to trade. On the substance, within the constraints and parameters they had been set, Liu He and US Trade Representative Bob Lighthizer produced a credible document. Its five major operational sections – on intellectual property protection, forced technology transfer, market access for agriculture, financial services and currency management – represent a substantive advance on where things stood before.
Take intellectual property, for example. There are three big changes. IP theft is to be criminalised in China for the first time. Second, if an allegation is made, the burden of proof will now lie with the alleged offender to demonstrate that they have not stolen an American firm’s IP. Third, an action can be brought without having to first demonstrate economic loss from the theft. Of course, these disputes will still fall within the jurisdiction of Chinese courts, but a bilateral IP protection working group will ride shotgun on it.
It still may fail. But in the absence of the Chinese surrendering their national legal jurisdiction altogether on IP matters (why would they, given no other country does?), this is probably about as good as it’s going to get.
More importantly, China has a deep national interest in making this, and the other parts of the agreement, work because failure to do so will lead to another outbreak of tariff warfare where China remains vulnerable.
Furthermore, with China now producing more and more of global IP – for instance, artificial intelligence – China’s reformers recognise they need innovators to be protected for their own country’s future.
The second part of yesterday’s trade deal is considerably less praiseworthy. It’s a mandated, $US200 billion increase in Chinese imports from America over two years, using 2017 as the benchmark. Given that the US exported a total of $US127 billion to China in 2017, this is a mind-boggling number. And the increase is projected to be sustained until 2025! This is mercantilism writ large.
It gets worse. The $US200 billion gets subdivided into $US77 billion in US manufactures; $US32 billion in agriculture; $US52 billion in energy; and $37 billion in the services sector. This begins to sound like the production targets contained in Stalin’s five-year plans for the old Soviet Union.
These sub-targets are to be made realisable by new sector-specific agreements between China and the US to remove structural barriers facing American exporters across the breadth of the agricultural and financial services sectors.
But here’s the rub for the Donald’s best mate Down Under, our very own Scotty from Marketing. How on earth can the US seek to sell China another $US32 billion of American beef, wheat, cotton and seafood – all listed in the agreement – without Australian exporters becoming collateral damage?
The same for energy, where liquefied natural gas and coal are explicitly listed among $US52 billion in extra energy exports to China in 2021 and 2022. Australia is currently China’s biggest supplier of both.
And given the fact that the Australian government, almost unique among US allies, appears to have killed the political relationship with Beijing stone dead, we currently have negligible political and diplomatic capital to draw on. So the challenge for Morrison, without the usual ducking and weaving, is to guarantee that America’s phase one deal with China will not penalise Australian exporters.
As for the rest of the US-China economic and trading relationship, the reality is that much of the hard stuff – like government subsidies to Chinese firms operating in the global market, fundamentally disrupting World Trade Organisation principles of competitive neutrality – have been kicked down the road to phase two negotiations.
Trump says these would start this week. Beijing is saying they will happen once the phase one deal is properly bedded down and implemented. So I’d be surprised if we see anything before the US presidential election.
Meanwhile, plans for varying levels of technological decoupling between the two countries continue, with Huawei the first of many cabs off the rank. New restrictions on Chinese nationals studying and working in America are being considered. Bilateral foreign direct investment is slowing. Although wider capital markets activity remains strong between China and the US; this is a $US5 trillion dollar business, and growing.
The truth is this phase-one deal offers a ceasefire, a temporary economic de-escalation, and some breathing space. But in the absence of any high-level strategic framework agreed between the two countries, the deep structural tensions pulling the US and China apart will continue for the medium- to long-term future.