By: Wang Wen Source: Valdai Discussion Club Published: 2020-01-23
China and the US signed the phase one (P1) trade agreement on Jan. 15, 2020. Additionally, in a recent interview, US Vice President Mike Pence said that negotiations for the phase two (P2) trade agreement are already under way. But in my opinion, the top priority now for the two powers is deciding how to ensure the implementation of the phase one trade agreement.
For China, there are at least two difficulties: First, China promises in Chapter 6 that "during the two-year period from January 1st, 2020 through December 31st, 2021, it would ensure purchases and imports into China of US of manufactured goods, agricultural goods, energy products, and services exceeding the corresponding 2017 baseline amount by no less than $200 billion." Such huge increases astounded the world. China's imports from the United States fell to $122.7 billion in 2019 from $153.9 billion in 2017. According to the agreement, China will import at least $232.2 billion from the United States over the next two years and will increase purchases by an average of about 70% annually, which is a rather difficult goal. It must be noted that China's imports from other countries besides the United States have increased by just $152.9 billion over the past five years.
From this point of view, China’s major trading partners such as the European Union, the Southeast Asian countries and Japan are worried about whether the country will reduce imports from them. Some even doubt that the China-U.S. trade deal is in compliance with WTO rules. There are chambers of commerce in Europe suggesting that the continent should pressure China into a trade negotiation so that it will import more European products.
Second, according to Chapter 4 of the agreement, China will need to lift restrictions on foreign investment in all areas of insurance, securities, funds and futures services by April 1st, 2020. Foreign investment currently accounts for less than 3 percent of China's insurance, securities, funds and futures sectors. Starting in the second quarter of 2020, large amounts of fund will enter China's financial markets, with an unpredictable effects on China’s financial markets.
There are also many difficulties for the US. For example, the U.S. is committed to opening market access for Chinese financial institutions and technology companies. HUAWEI, SANY and other companies from China had planned for many years to enter the US market, and hundreds of Chinese companies hope to pursue an IPO in New York. Whether the promise of the United States can be fulfilled is also a test of Washington's sincerity.
But overall, this agreement indicates that the two global powers are willing to equally and rationally resolve the disputes ahead of them on the basis of mutual understanding. It also reflects the responsibility of the two global powers, who strive to keep bilateral relations away from the ‘Thucydides trap’. This agreement is in line with the long-term interests of China, the United States and the rest of the world. In this agreement, "cooperation" has been mentioned 42 times, "exchange" 14 times, "confirmation by the United States" 28 times, "avoid" 8 times, and "competition" 8 times. Then there are three key words which can be used to describe this agreement:
The first key word is ‘Equality’: the agreement sees the two sides as equals, rather than setting the stage for a heavyweight and a lightweight player. Compared with the beginning of the negotiations one and a half years ago, when the US put forward some unequal, unilateral demands, now the results of the tough negotiations are not easy for China.
The second one is ‘Respect’: The content of the agreement embodies the principle of mutual respect for each other's legal systems and demands. Just like in chivalrous societies, it is necessary for the countries to create an international atmosphere of compliance where they ‘do not use dirty tricks’ in the game.
The third one is ‘Rational’: Despite the twists and turns of the process, the two countries are working towards resolving their differences through negotiation and eventually reaching a mutually-recognised agreement. However, it was the first stage, and the P2 trade agreement negotiations will be more difficult. But all create a platform for the two sides in the future to jointly ‘enter’ rather than detour ‘off-site' to deal with the problem, and pursue rational negotiations rather than unilateral action.
In fact, much of the content of the agreement, which is regarded as China's ‘commitment' by the US, consists of the objectives set out at the Third Plenary Session of the 18th Central Committee of the Communist Party of China more than 6 years ago. China has only ‘reaffirmed’ its firm resolve in the agreement, and the signing of the agreement has created a favourable external environment for China to continue to deepen reform in an all-round way. In addition, the agreement also shows that the role and impact of the IMF and other international institutions are in the promotion. No doubt that in the consolidation of the existing international economic order, to prevent and early resolve the world economy stall countries into trade protection of the major risks.
Of course, some people may worry about the content of financial openness. As the article says, Sino-US financial openness is reciprocal; opening up will also force China to deepen its financial reform. The P1 agreement is only a rest from the normal game between the U.S and China, the differences between the two powers can’t have a ‘once and for all’ solution. In the future, China will need to take a series of courses in international law, international economics, international business and international finance to make greater contributions to safeguarding China's national interests.
Actually, the final result of the negotiation is in line with China's overall goal of deepening reform and boosting consumer demand. At present, more than 65% of China's oil is imported. China is the world's largest importer of chips, integrated circuits, semiconductors and other products. From this point of view, there is nothing wrong with importing more American goods.
The $232.2 billion-dollar increase in annual imports from the US can’t be a burden to China, where the population topped 1.4 billion in 2019. Total retail sales of consumer goods have been about 6 trillion dollars annually, and are increasing at a rate of 8% and near $500 billion dollars. In the next two years, it is expected that 1 trillion dollars of consumption will be generated in China, which will surpass the US as the largest consumer market in the World.
The U.S presidential election is this year. The P1 agreement has become President Trump's first term's big achievement. Although it can be expected that during the presidential election, China will remain a major public topic and be subjected to all kinds of criticism, speculation and discredit, China has become accustomed to the rule that "every US election, they must scold China."
The economic and trade frictions between China and the US over the past two years have finally reached a ‘cease-fire agreement’, which is based on the principles of mutual respect, equality and mutual benefit. The policy makers of both China and the US have sufficient political wisdom to properly solve the complex and sensitive problems between the two countries, which not only benefit the people who live in them, but also contribute to the stability and sustainable prosperity of the global economy.
The author is executive dean of the Chongyang Institute for Financial Studies at Renmin University of China.