A trade deal signals a thaw between Trump and China, but it sets a potentially worrying precedent

Is the agreement a victory for unilateralism? Ireland and the globe are braced to find out.

By Paul Rodgers EY

On 15 January, the US and China signalled a thawing of their high-profile trade dispute by signing an economic and trade agreement.

But what does it contain, what does it mean for US-China trade relations and, perhaps most crucially, what does it mean for the wider, multi-lateral, rules-based system of global trade?

While the agreement is being touted as a much-heralded compromise, the content of the agreement points to China doing most of the compromising and that, in reality, it signifies a victory for President Trump’s combative, unilateral approach to trade negotiations.

President Trump was elected on a slogan of “America First” and, concerning trade policy, he has often been referred to as a “protectionist”.

This is only accurate up to a point. He has not sought to raise general Most Favoured Nation tariffs but rather uses the threat of additional tariffs unilaterally to achieve specific objectives, both trade-related, as in the case of China, and political, in the case of Mexico. A more accurate description may be to refer to President Trump employing the “weaponisation of trade”.

The main subject to his ire from a trade perspective has always been China – addressing the long-standing US unhappiness at Chinese practices around, and lack of protection of, intellectual property and technology transfers. It also allowed him to address his pet issue of the US balance of trade with China.

Rather than availing of the Dispute Settlement Body of the WTO, President Trump sought to combat Chinese practices by unilaterally introducing harsh additional tariffs of up to 25% on Chinese origin goods.

Impact of the dispute

The US introduced additional duties on certain Chinese-origin goods in four waves: 25% on $34 billion worth of goods under List 1 (industrial goods); 25% on $16 billion worth of further goods in List 2 (also industrial goods); 25% on $200 billion worth of goods under List 3 (mixture of industrial and consumer goods); and 15% on $300 billion of goods under List 4A and the proposed List 4B (consumer products). 

In response, China issued retaliatory additional duties for each of the four rounds impacting $185 billion of US origin goods.

Source: SIPA USA/PA Images

Given the size of both economies, this trade dispute has had a major impact on global trade generally – in fact, it is estimated that if the trade uncertainty created by the US-China dispute continues it could drain $585 billion from global GDP in 2021. Moreover, in 2019, China’s economy grew at its slowest rate for almost thirty years. This was due to several factors, one of which was the US tariffs. Something had to give.

The agreement signed last month was signalled back in October 2019 and is being touted as a “Phase 1” agreement as the US and China work to normalise their trade relations on an ongoing basis.

On the face of it, the Agreement represents a clear victory for President Trump’s unilateral, combative trade policy as it focuses on China addressing many of the US issues with Chinese trade practices and agreeing to increase its import levels of US goods.

For its part, the US separately agreed to suspend the additional tariffs on List 4B goods (implemented back in December 2019) as well as reduce the additional tariffs on List 4A goods from 15% to 7.5% effective from 14 February 2020. Both List 4A and 4B were aimed primarily at consumer products – e.g. apparel, footwear, electronic goods – and were expected to significantly impact Chinese exports.

However, all existing additional tariffs already implemented by both the US and China shall remain in place…for now.

The issues addressed in the agreement include China committing to strengthening its protection of intellectual property, patents, trade secrets and to combat online piracy and the export of counterfeit goods and software. 

China also committed to prohibiting practices of forced technology transfers and state aid for acquiring foreign technology and to addressing non-tariff barriers on US agricultural goods and infant formula. 

The country also committed to increasing import levels of specific US goods and services including industrial machinery, electrical equipment, pharmaceuticals, medical instruments, aircraft, vehicles, meat, cereals, seafood, other agricultural commodities, oil and gas and financial services. 

Part of the agreement also involved the setting up of a bilateral evaluation and dispute resolution process to address the implementation of the Agreement and any future trade issues.

Furthermore, the US has indicated that certain trade issues remain to be resolved and they expect them to be looked at in a “Phase 2” agreement. As such, the US has confirmed that its additional tariffs will remain on Chinese goods to ensure fair and equitable negotiations.

What does this mean?

The Agreement appears to be a validation of the US unilateral trade policy.

While many other countries agree with President Trump’s stance on Chinese trade practices, as do many of his Democrat political opponents within the US, they do not agree with his methods. They believe the correct approach should have been to utilise the existing Dispute Settlement Body in the WTO rather than take stand-alone action based on a subjective interpretation of the WTO’s own GATT Agreement.

In other words, you do not attack breaches of the rules-based multilateral trade order by playing fast and loose with those rules.

The EU’s Trade Commissioner, Phil Hogan, has criticised the deal, referring to it as “managed-trade”, the content of which may be in breach of the WTO principles, including the basic principle of non-discrimination against other, i.e. non-US, exporters to China of the products covered by the agreement.

From an Irish perspective, China is now Ireland’s 3rd largest market for agri-food exports, with 2018 exports valued at €758 million.

It is particularly strong in the dairy, meat, seafood and infant formula sectors. The US-China Agreement could hit Ireland’s burgeoning Chinese exports if US agri-food products including meat, seafood and dairy products were to be given preferential access.

Furthermore, in 2018, Irish infant formula made up 13% of the Chinese market and the proposed removals of non-tariff barriers for US infant formula may also have an impact on this sector.

At a global level, it sets a potentially worrying precedent.

If unilateralism and the “weaponisation of trade” are seen to be effective, and a rules-based democracy such as the US is the initial proponent, regardless of the strength of its complaint against China, then others may use this precedent to take unilateral trade action without due cause.

In doing so, the future of the multilateral system of global trade and the WTO itself may come under threat.

Paul Rodgers is an EMEIA Director of Global Trade at EY

Get our Daily Briefing with the morning’s most important headlines for innovative Irish businesses.