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Explained: The ‘Phase One’ agreement between US and China

Critics of the trade deal were saying on Saturday that it would bring only temporary relief in the over 18-month-old trade war between the US and China.

By: Explained Desk | New Delhi | Updated: December 17, 2019 12:04:12 pm
Explained: What is the 'Phase One' agreement that the US and China have just signed? US President Donald Trump (L) and Chinese President Xi Jinping. (File)

On Friday, the United States and China announced a “Phase One” agreement under which the US will reduce some tariffs in exchange for increased Chinese purchases of American farm and energy goods.

At a press conference in Beijing, Chinese officials said that both countries have made major progress on their trade negotiations.

“The Chinese side believes that China and the United States, the world’s two largest economies, must deal with bilateral economic and trade relations with the big picture in mind. Reaching the agreement will serve the fundamental interests of the people of the two countries and the world, and is expected to bring positive influences on areas including economy, trade, investment and the financial market,” China’s state media reported on Saturday (December 14).

Earlier, on December 13 evening India time, US President Donald Trump posted on Twitter: “We have agreed to a very large Phase One Deal with China. They have agreed to many structural changes and massive purchases of Agricultural Product, Energy, and Manufactured Goods, plus much more. The 25% Tariffs will remain as is, with 7 1/2% put on much of the remainder… The Penalty Tariffs set for December 15th will not be charged because of the fact that we made the deal. We will begin negotiations on the Phase Two Deal immediately, rather than waiting until after the 2020 Election. This is an amazing deal for all. Thank you!”

What is the “Phase One” agreement between the two countries?

A statement issued by the office of the United States Trade Representative (USTR) said that the US will be maintaining 25 per cent tariffs on approximately $250 billion of Chinese imports, along with 7.5 per cent tariffs on approximately $120 billion of Chinese imports.

“The United States and China have reached an historic and enforceable agreement on a Phase One trade deal that requires structural reforms and other changes to China’s economic and trade regime in the areas of intellectual property, technology transfer, agriculture, financial services, and currency and foreign exchange,” the statement said.

According to a fact sheet published by the office of the USTR, in the Phase One agreement, the chapter on trade expansion mentions commitments from China to import various US goods and services over the next two years, the total amount for which will exceed China’s annual levels of imports for those goods and services in 2017 by not less than $200 billion.

The agreement addresses unfair currency practices by committing to refrain from competitive devaluations and exchange rate targeting. “This approach will help reinforce macroeconomic and exchange rate stability and help ensure that China cannot use currency practices to unfairly compete against U.S. exporters,” it says.

If the agreement is signed, for the first time in any trade agreement, China would have agreed not to pressure foreign companies to transfer their technology to Chinese companies.

So is this an “amazing” trade deal, as President Trump claims?

Critics of the trade deal were saying on Saturday that it would bring only temporary relief in the over 18-month-old trade war between the US and China. A report in The New York Times said: “A trade deal that took nearly two years to reach and inflicted global economic damage in the process does little to resolve the United States’ biggest concerns about China’s trade practices, including its use of industrial subsidies and state-owned enterprises to dominate global industries like steel and solar panels.”

However, the report pointed out that the deal would increase Chinese purchases of American agricultural and energy products, and also place limits on Beijing’s ability to weaken its currency and provide greater protection to US companies that are operating in China.

Ahead of his presidential re-election campaign, this deal may help Trump portray himself positively among American farmers.

According to the USTR fact sheet, the chapter on agriculture addresses “structural barriers” to trade and supports a “dramatic” expansion of US food, agriculture and seafood product exports, which is expected to increase American farm and fishery incomes and promote job growth.

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