Phase 1

US Trade Policy Under Biden: More of the Same

US Trade Policy Under Biden: More of the Same

United States Trade Representative (USTR) Katherine Tai gave what was billed as a major speech at CSIS outlining US trade policy on October 4. A careful review of China policy has been underway for months and Tai’s speech was to deliver the results of this study. At the end of her prepared remarks and a short round of questions, observers were left with few clues about the future trajectory of US policies and little detail beyond broad brush strokes already sketched over previous months. What was made clear is that US trade policy, in practice, is not likely to look substantially changed from paths pursued by the previous Trump administration. In fact, if Tai’s speech were read alongside similar policy statements made under the Trump team, it would be difficult to pick out who said what. First, Tai argued that China has failed to follow appropriate actions or adjust its bad behavior despite a long history of engagement. The approach used under the Trump administration, in particular the Phase 1 agreement, may not have been exactly the model she would have chosen (what model she might have thought more suitable was not discussed), but it remains in place. Tai did express distain for the term “Phase 1,” even as she essentially promised to follow it. Tariffs will continue to be imposed on Chinese imports, although the administration will restart the process of reviewing requests for exclusion. With limited details available on the process, however, it is unclear whether tariffs will be waived in large part, or only in limited circumstances. Nor was there any clarity on how long the process may take to conclude. Given the relatively limited time “left” on the Phase 1 agreement, even a short delay may deliver only modest benefits to US firms struggling to manage tariffs of up to 25% which have now been imposed, in some cases, for years.

US-China Trade War: Still Grinding On

US-China Trade War: Still Grinding On

But the US-China trade war continues to grind on. While coronavirus takes the headlines, the economic damage from more than two years of trade hostilities between the two largest global economies continues to take a toll. Worse, US President Donald Trump appears eager to escalate the fight all over again for the rest of this year. Many people seemed to have stopped paying attention the trade conflict back when the Phase 1 “deal” was signed in January and implemented on February 14 (both dates seem like a lifetime ago already!). As we noted at the time, the Phase 1 deal was never likely to hold. The agreement had promises in a variety of areas from intellectual property rights to financial services. But the most important element was a promise to purchase goods. The US insisted that China buy $200 billion in products ranging from soybeans to energy in a two-year time frame. This target was never realistic. It was nearly double any previous purchases made by China for US exports and it was coming off extremely low export figures across the duration of US-China tariff escalation. The Phase 1 deal arrived just as the COVID-19 situation was taking off in China. With factories and shops shuttered across the country (and not just in Wuhan at the epicenter), Chinese imports from everywhere sagged. Meeting the series of purchasing targets went from impossible to never-going-to-happen. So what was the appropriate US response? There were two options available to Washington. First, to acknowledge that the scale and depth of the crisis made previous commitments unattainable in the short term and either recalibrate the expectations, adjust the target levels, or shift the timeline. Second, to complain loudly that China had failed to meet the purchasing targets and start the whole conflict all over again.

Phase 1 US-China: Implications for Asia

Phase 1 US-China: Implications for Asia

What does this mean for Asia?  At least three things seem obvious. First, the tariff pressures are going to remain for companies.  Not only are firms still subject to extensive tariffs, but the risk of future increases is only marginally reduced.  In the very best case scenario, firms will continue to pay 25% tariffs for another 10 months. Companies may not be able to weather this extent of damage for so much longer.  Many companies will finally pull the trigger on relocation plans.  Most of the supply chain adjustment will not be redirected back to the United States, but will be shuffled around globally.  Many Asian markets are obvious places for moving manufacturing.  Second, the restrictions on Chinese investment into the US will remain in place.  Chinese investment dollars are likely to be redirected, including into other Asian markets.  The impending start of the Regional Comprehensive Economic Partnership (RCEP) will accelerate this trend.