China won’t meet its phase one commitments, leaving the path open for an escalation in the trade war – or a radical change in how it’s being fought.
China committed to importing over $200 billion of US-manufactured and agricultural goods under the phase one trade deal, signed earlier this year. But COVID-19 means that US goods exports to China might only be $60 billion – a shortfall of $129.6 billion, according to the Centre for Strategic and International Studies (CSIS).
“The targets were never realistic; they were just gaudy numbers meant to impress,” said Scott Kennedy, senior adviser trustee and trustee chair in Chinese business and economics. “The pandemic made the [unrealistic impossible].”
The biggest shortfall was in manufacturing, with China failing to meet its commitments by over $19 billion. Energy exports to China fell by 33.3 per cent when they were expected to grow over 160 per cent, while agriculture exports – expected to grow by 52.1 per cent – only grew 3.2 per cent.
That leaves the US with three options, according to Mr Kennedy. They can go through the multistage dispute resolution system to reach renegotiated targets; enact penalties and potentially withdraw from the agreement; or acknowledge that China failed to meet its commitments for reasons outside its control and not submit a complaint.
All of those options have their own pitfalls – the first might see China quit the deal themselves, the second would end any progress towards a more comprehensive deal, and the third could result in China taking advantage of the more “magnanimous” approach.
“There is a fourth option, but it is not one the administration will choose: admit that the purchases component of the deal was a mistake to begin with and reconsider their entire approach to China,” Mr Kennedy said. “The specific quantitative metrics were not just unrealistic, they violated America’s traditional commitment to free trade and undercut a multilateral trading system that has served the United States exceptionally well over the past seven decades.”
That would see the US launching a policy rethink across digital trade, investment, and competition, and then leveraging that rethink to push China to further liberalise and marketise its economy both domestically and internationally.
“That does not mean giving up bilateral negotiations and even some kinds of unilateral action in certain circumstances,” Mr Kennedy said. “Instead, it means tilting the overall playing field in America’s favour, which would translate into a greater opportunity to advance US interests on the full range of economic issues it faces with China, including promoting US exports.
“The data now show that the current experiment is not up to the challenge.”