The ground is set for the United States and China’s trade agreement Wednesday. This “phase one” of an intended two-phase deal is a win for President Trump, but one that China will work hard to undermine in the near future.
This deal is still worth signing, as is reflected by renewed market confidence alongside the deal’s conclusion. Trump has put realism rather than populism front and center in his economic policy. While more hawkish trade envoys in the Trump administration wanted more here, the agreement reflects what’s possible and preferable now. China has pledged to increase its purchases of U.S. goods and services by $200 billion over the next two years; in return, U.S. tariff rates will go down, and new tariffs will be suspended.
This should boost U.S. business investment, especially in a manufacturing sector that, largely thanks to the trade war, is now in recession. And, as Trump looks to consolidate the strong economy as his reelection cornerstone, the deal will boost his campaign’s optimism.
China also wins here.
Suffering deeply from U.S tariffs and state mismanagement of capital, Xi Jinping hopes this will lure back foreign investors who are increasingly departing China for other Southeast Asian countries. Under pressure over his handling of the Hong Kong protests and with his “China Dream” vision rejected again in last week’s reelection of a Beijing-skeptical president in Taiwan, Xi now has at least a temporary win to his name.
But the phase two negotiations will be much more complicated and, for America, a lot riskier.
The Wall Street Journal hints at the first challenge here with its observation that the phase one deal carries “unspecified measures to address intellectual property concerns.” That lack of detail speaks to the great challenge facing U.S. negotiators going forward.
Beijing will do everything possible to avoid formal constraints on its more destructive economic behavior. On intellectual property, China will continue its global intelligence campaign to steal the most advanced new hardware and software. That effort won’t be sacrificed, as that would mean sacrificing Xi’s ultimate ambition of a Chinacentric international economic and political order.
China will also push hard for acquiescence on its technology industry. In particular, Beijing will demand sanctions relief for Huawei and an end to U.S. efforts to persuade allies to block Huawei from 5G networks. I worry here that Trump will view an agreement here as tolerable in return for massive increases in Chinese purchases of U.S. goods. That would be a terrible error, jeopardizing U.S. security and giving China a key tool with which to reshape international order for a short-term economic boost.
This speaks to the ultimate point with China. Namely, that Xi is the new Khrushchev and China the new Soviet Union. It poses a profound threat to U.S. security, prosperity, and global freedom. And it intends to impose that threat in ever increasing measure. Ultimately, only U.S. leadership will prevent that threat from being fulfilled.
So, yes, this trade deal is good. But U.S. red lines on intellectual property and communications infrastructure must stand firm in phase two.
