The US-China ‘phase one’ deal will unwind some tensions, but not much else

The United States and China seem just about ready to sign off on a “phase one” trade deal. And while the latest show of progress could wind back the clock somewhat, the trade war is still far from over.

The deal has yet to be formally announced. But President Donald Trump has signed off on the agreement, which would likely delay another round of US tariffs scheduled to take effect Sunday, according to US officials and others familiar with the matter. It would also reduce existing tariff rates in exchange for Chinese purchases of US farm goods.

Investors are happy with the progress right now. Major indexes in Asia closed up between 1% and 3% Friday.

Even so, the deal could leave tariffs on many goods in place and wouldn’t address the major structural changes to the Chinese economy that Trump has sought, like the abandonment of a state-led economic model or unrestricted access for US companies. And China’s initial response — or lack thereof — to news of the deal Friday suggests that the relationship between the two superpowers will likely remain complicated.

Falling short of a milestone

The trade truce would likely avert the duties the United States is scheduled to levy against $155 billion worth of Chinese goods Sunday. And other media outlets such as the Wall Street Journal have reported that it could require China to make other changes, like further opening up its financial services market. But it falls well short of a comprehensive agreement.

“It’s a sign of confidence, but not a landmark breakthrough,” said Willy Lam, an adjunct professor at the Center for China Studies at the Chinese University of Hong Kong.

That doesn’t make the deal meaningless. China’s economy has been bruised by the ongoing trade war, which makes any sort of reprieve welcome. And Trump can claim a political victory to boost his campaign ahead of the 2020 US election.

But Lam called the deal “just the first step in the long process to mend the US-China divide.”

Remember, the United States still wants China to implement sweeping structural changes, including significant reductions in the state’s role in the economy and more concrete ways to protect foreign intellectual property. Experts have dismissed some of the drastic demands as unlikely because they are at odds with the fundamental ways in which China’s government works.

Lam said whatever discussions come next could be “much more difficult” for the two countries, adding that a potential “phase two” deal could take up most of next year.

Alex Capri, a senior fellow and lecturer at the National University of Singapore, said other pressure points between the two countries could keep escalating, particularly involving technology. He suggested, for example, that China could double down on efforts to bolster its homegrown tech supply chains in the light of the US onslaught on companies such as Huawei.

That could lead Beijing to give out more subsidies to help state-owned enterprises or take other measures to secure IP rights — moves that would run contrary to what the United States wants.

A divide within China?

The latest sign of progress on the agreement, which has been in the works since October, first broke Thursday evening in the United States. By Friday afternoon in China, though, Beijing had yet to release any official statement confirming the agreement. Much of the country’s state media was quiet, too.

The Global Times, a state owned tabloid, criticized Washington for divulging details about the trade talks. On Twitter — which is banned in mainland China — the media outlet called for “calm,” as the Chinese government has yet to reveal any information about the deal.

That kind of discretion might be a sign that the government is worried about stirring nationalist fervor in the country, said Lam. Such sentiment could complicate efforts by the trade team and President Xi Jinping to reach a deal with the United States.

There’s also no guarantee that Beijing will have a unified response. While China’s Commerce Ministry has usually been cautious about it how talks about its relationship with the United States, other parts of government have been less diplomatic.

Chinese Foreign Minister Wang Yi, for example, lashed out at the United States on Friday for “seriously damaging hard-won mutual trust.” Wang wasn’t talking about the trade deal, but instead criticizing Washington for approving bills supporting Hong Kong protesters and calling for sanctions on Beijing over reports of mass detention centers in China’s Xinjiang region.

When asked by a reporter later about the “phase one” deal, Foreign Ministry spokeswoman Hua Chunying deferred comment to the country’s Commerce Ministry. But she noted that markets were rising on the news, indicating that a deal “is in line with the fundamental interests of the two countries.”

The Foreign Ministry’s hard line is not surprising, given the tensions between the two countries, said Ronald Wan, chief executive at Partners Capital International in Hong Kong. Instead, he suggested looking for a response from other parts of the government, which he suspected were still working on final details about the deal.

“They may be thinking it’s not the time to celebrate for anything yet,” Wan added.

— Jill Disis, Kevin Liptak and Lily Lee contributed to this report.