China-US trade agreement: implications for third countries

A preliminary reading

Yun Jiang, co-editor of China Neican

The recently signed trade agreement is a win for Trump and certain US business interests. But it is a bad deal for businesses in other countries that compete with US businesses, especially in the agriculture and energy sectors. It is another worrying step in the departure away from the rules-based mutilateral trading system, which protects the smaller economies.

The details of the Agreement has finally been released. It is quite extensive, covering intellectual property, technology transfer, and financial services. Headings in this agreement include pharmaceuticals, infant formula, notarization procedures and the insurance sector. Here are my preliminary thoughts of this 86-page document.

Trade diversion

China’s commitment to purchase more US goods and services is welcoming news for US businesses, including the important constituent that is US Midwest farmers, who have been hard-hit by the trade war. However, this agreement will reduce China’s purchase of goods and services from other countries.

In sectors such as agriculture and energy, China (like most countries in the world) is focused on securing supplies for domestic demand. Food security and energy security are often seen as national security issues. China is unlikely to expand imports in those industries to an extent that affect its domestic producers too much. This will reduce other countries’ exports to China. For example, Brazil’s soybean exports will likely be affected. On the other hand, China is very happy to import more pork from the US… for now, due to the pork shortage from the African swine fever.

Non-discrimination and the multilateral trading system

Under the chapter in Trade in Food and Agricultural Products, there is an extensive list of what China has agreed to, in terms of giving market access to US businesses and products. This covers dairy and infant formula, poultry, beef and pork, and aquatic products. However, it appears unlikely the same treatment will be extended to products from other countries given the clauses specifically refer to US regulators. As Australia also exports beef and diary (and infant formula) to China, it may be adversely affected by this trade deal.

The implication of a trade deal between two big economies is that smaller economies such as Australia will likely lose out. The rules-based multilateral trading system, as exemplified by the WTO, is built on rules that constrain the big economies. The US and China have been focused on this bilateral deal, at the expense of putting more energy into the reform of the WTO, which is on its deathbed.

Trade balance

The Trump Administration has been focused on the bilateral trade balance with China. Trump uses the trade deficit as evidence that China is “ripping-off” Americans. By that same logic, Australia is “ripping-off” the Chinese. But the bilateral trade balance is highly misleading. For example, if China imports inputs from Australia and South Korea, assemble the inputs and then exports to the US — this process would appear in the bilateral trade balance between China and the US, but Australia and South Korea’s trade balances with the US would be unaffected.

Trade agreements such as this will not change US overall trade balance — it may reduce its bilateral trade deficit with China, but then it will increase its bilateral trade deficit or reduce its bilateral trade surplus with other countries.

Intellectual property and technology transfer

The whole trade war supposedly started due to the US section 301 investigation into China’s intellectual property (IP) and technology transfer regime. Stricter enforcement of IP protection moves profit from the consumers to the producers of IP. As China moves closer to the technology frontier and becomes a bigger producer of IP, it will naturally want to have a stricter IP regime. Note that in the US, theft and misappropriation of trade secrets, which is covered by this trade agreement, only became a federal crime in 1996 under the Economic Espionage Act.

If this agreement does lead to stricter enforcement of IP, then IP-heavy businesses in China (likely from the US, EU, and Japan) will gain, and businesses and consumers that use IP in China will lose. Chinese consumers will probably welcome the stricter enforcement of counterfeiting laws, especially counterfeit pharmaceuticals, which has greatly impacted people’s perception of domestic products in China.

On technology transfer, China has agreed to not require the transfer of technology as a condition of market access. It has also agreed to not direct outbound foreign direct investment to acquire technology targeted by its industrial plans. There is a big question mark on how that can be enforced or even detected/proven.

Decoupling

With all the talks of decoupling, this trade deal shows that the US and China are both willing to further intertwine their economies, at least in selected industries.

Adam comment: Beijing is happy to sign because that’s a way to stop bilateral relations getting worse. It understands that competition and cooperation will co-exist even as it predicts that China will keep rising relatively to the US. Beijing did not have to make any significant structural concessions, which lay at the root of the bulk of US greviances. China’s polito-economy and its system is intact. What we are seeing is a tactical interlude, and not the start of an enduring settlement.