By Penelope B. Prime
The U.S. and China have reportedly reached a so-called phase one deal in their ongoing trade war.
While few details have been disclosed, the agreement principally seems to involve the U.S. calling off a new round of tariffs that were slated to take effect on Dec. 15 and removing others already in place in exchange for more Chinese purchases of U.S. farm products.
Good news, right? The end of the trade war is nigh? Don’t get your hopes up.
While business leaders in both countries will be temporarily relieved, the underlying tensions between them will not end easily.
As an economist who closely studies the U.S. relationship with China , I believe there are fundamental issues that won’t be resolved anytime soon.
Doing it in phases
Tariffs and other trade issues have received most of the attention during the trade war, but the more fundamental — and difficult — challenges are with lax intellectual property protection and China’s industrial policy.
The U.S. is unhappy with China’s use of these tools to develop its economy, and to help its companies compete — unfairly, from the U.S. perspective. And many of the Trump administration’s demands challenge China’s normal business and policy practices.
China’s leaders can’t be seen by Chinese citizens as giving into the U.S., while Trump wants to show that he is tough on China ahead of his re-election. This makes the negotiations very sensitive on both sides. That’s why American and Chinese negotiators, who have been engaged in talks for almost two years , decided to try to get to an agreement in phases.
Phase one has focused on the trade balance and tariffs. Phase two is expected to then deal more deeply with intellectual property enforcement and economic reform in China.
Given the negotiations have gone on so long with fairly little to show for it, it’s fair to ask, why are these issues so difficult to resolve? I believe there are basically three issues that have made finding any common ground difficult — and phase one won’t change that.
First, China’s successful growth has combined market competition with government-led industrial policy. For example, when China’s leaders decided the economy needed more innovation, it created incentives and targets for companies and research institutes to create patents. The number of patents filed has soared as a result.
A wide range of government subsidies is used to direct and assist private as well as state investment in similar ways.