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US-China Trade Deal Draws Praise, But Leaves Considerable Unfinished Business

Investors monitor stock prices at a brokerage in Beijing, Jan. 16, 2020. Share prices are mixed in moderate trading in Asia after the U.S. and China signed a preliminary trade agreement.

The "Phase 1" trade deal between the United States and China, signed with much fanfare at the White House on Wednesday, is being met with qualified praise by most trade experts who see good news in any reduction of tensions between the world's two largest economies.

The deal also leaves many major challenges to be addressed in a "Phase 2" negotiation that experts believe will be far more difficult to complete successfully.

The Phase 1 agreement gives the U.S. some assurances that China will reform some of its practices related to the treatment of intellectual property, open its markets to U.S. financial services firms, and purchase more U.S.-made goods and services, particularly in the area of agriculture.

However, it leaves tariffs in place on a large majority of goods traded between the two countries, and doesn't address major points of concern, including Chinese industrial policy that subsidizes domestic companies to make them more competitive internationally. It also doesn't specifically touch on theft of proprietary business information that the U.S. claims is abetted by Beijing.

The two countries have been engaged in a trade war for nearly two years, with tariffs in place that have grown to cover hundreds of billions of dollars' worth of goods. Both sides have experienced considerable economic pain as a result, making any move to reduce the tension welcome to most trade experts and representatives of the business community.

FILE - President Donald Trump signs a trade agreement with Chinese Vice Premier Liu He, in the East Room of the White House in Washington, Jan. 15, 2020.
FILE - President Donald Trump signs a trade agreement with Chinese Vice Premier Liu He, in the East Room of the White House in Washington, Jan. 15, 2020.

"We commend both governments for staying the course and taking this important step to rebuild trust and restore some stability in the world's most important commercial relationship," Thomas J. Donohue, CEO of the U.S. Chamber of Commerce, said in a statement. "This deal provides much needed certainty to American businesses as they begin the new year."

"I think this is actually very good news for the U.S. economy," said economist Ed Lazear, a senior fellow at the Hoover Institution, in an interview with CNBC. "It's important that we finally got this thing going. We've been talking about it for a long time. The tariffs were supposed to be a vehicle that would get us to a trade deal."

Lazear, who served as chairman of former President George W. Bush's Council of Economic Advisers from 2006 to 2009, cautioned that it would be a mistake to expect too much from the agreement.

"It's not going to be transformational in terms of how it affects our economy," he said. "If we take the administration's numbers as given and assume that they're accurate, and then no reason to assume that they won't be accurate, we're talking about something like a half a percentage point of GDP."

Key elements of the agreement

Intellectual property protections
The U.S. has for years protested the Chinese government's failure to enforce international agreements meant to protect infringement of copyrights, and theft of trade secrets and other proprietary information. The deal signed Wednesday commits Beijing to criminal prosecution of individuals caught stealing trade secrets, and to a crackdown on the sale of pirated goods.

Forced technology transfer
For years, a condition of doing business in China for many foreign firms has been the requirement that sensitive technology be transferred to a Chinese partner company as a condition of market access. The agreement commits China to ending that practice and allowing any transfer that does take place to be on market terms.

Market access for financial services firms
U.S. banks, insurers, securities firms and other financial services providers have until now faced significant barriers to entry in the Chinese markets. The Phase One deal will allow them to compete on a more level playing field inside China by removing restrictions on foreign ownership of financial services companies and other restrictions.

Currency manipulation
China's historic use of currency manipulation to give its exporters a competitive advantage over foreign competitors has long been a concern for the Trump administration. Although in recent years, the Chinese government has refrained from many of the practices that used to infuriate U.S. businesses, the deal contains a set of provisions meant to block China from reverting to its old practices.

Opening markets to U.S. agriculture
The agreement removes many structural barriers that have made it difficult or impossible for U.S. agricultural products to be sold in China. The deal addresses a wide range of goods, from meat and produce to infant formula and pet food.

FILE - A cargo truck drives amid stacked shipping containers at the Yangshan port in Shanghai, China, March 29, 2018.
FILE - A cargo truck drives amid stacked shipping containers at the Yangshan port in Shanghai, China, March 29, 2018.

Increased purchases of U.S. goods by China
Trump's longtime concern about the trade deficit between the U.S. and China will be partially addressed by a commitment from Beijing to increase its purchases of U.S. goods and services by $200 billion over two years, and to "continue on this same trajectory for several years after 2021." Experts have warned that it seems unlikely that China will be able to meet that requirement, especially in the years following 2021.

Enforcement mechanisms
The agreement creates an unusual dispute resolution process that bypasses any third-party involvement, relying on bilateral consultations that leave both sides the option of imposing punitive tariffs if they believe the other side is not conforming to the deal.

What the deal leaves out

Industrial subsidies
The deal does not address China's practice of creating substantial financial subsidies for its domestic industries, which it does through a complex web of low-interest loans, directed government spending, favorable regulatory treatment and more. U.S. officials have indicated that the issue of industrial subsidies is a key element of the proposed Phase Two talks.

Over the past several years, the U.S. and other countries have identified multiple instances in which hackers, some clearly tied to and supported by the Chinese government, have been caught attempting to penetrate the computer systems of foreign businesses in order to steal intellectual property. The intellectual property provisions of Phase One commit both countries to combating the "misappropriation" of trade secrets. However, some experts have advocated for a more specific promise by China to refrain from supporting or benefiting from hostile computer hacking.

Future use of tariffs
Trade experts are largely in agreement that tariffs create undesirable distortions in international trade, and ought to be used only when absolutely necessary. However, the agreement leaves in place tariffs on hundreds of billions of dollars' worth of annual trade, and creates a mechanism for the unilateral imposition of new tariffs if either party to the agreement feels the other has not lived up to expectations. This has led experts such as Chad Bown of the Peterson Institute for International Economics to speculate that permanent tariffs might become the "new normal" for U.S.-China trade relations.

Whether and when negotiations on a Phase Two agreement will begin is unclear. Trump has signaled that he plans to wait until after the 2020 elections to relaunch trade talks. China, however, had signaled that Beijing would prefer an earlier start.