◎ The “phase one” trade deal is a political “Catch-22” for Xi Jinping, whose “quan wei” and grip on power is far less secure than popularly believed.
(Updated on Jan. 4, 2020)
On Dec. 13, the United States and the People’s Republic of China “reached an historic and enforceable agreement on a Phase One trade deal,” according to a statement released by the Office of the United States Trade Representative.
Neither the U.S. nor the PRC made available the full text of the deal, which is reported to contain 86 pages. Official information released by both sides on the “phase one” trade deal was lacking in details and vague in some areas. The U.S., however, made public substantially more details and information about the deal than the PRC.
Key information about the trade deal released by the U.S. includes:
1. The U.S. agreed to suspend tariffs on $160 billion of Chinese goods scheduled to go into effect on Dec. 15, 2019. Existing tariffs of 15 percent on $120 billion worth of other Chinese goods would be cut to 7.5 percent, while 25 percent tariffs on another $250 billion worth of Chinese goods would be kept in place. Meanwhile, the PRC agreed to suspend retaliatory tariffs due to take effect on Dec. 15, 2019.
2. The PRC promised to buy $32 billion more in U.S. farm products over the next two years, on top of a baseline of $24 billion in purchases in 2017. Also, the PRC agreed to make a “big effort” in spending an additional $5 billion a year. U.S. Trade Representative Robert Lighthizer told reporters at the White House that the PRC can buy the U.S. products when “it’s the perfect time in the market to buy things.”
3. U.S. Trade Representative Lighthizer said that Beijing agreed to import at least $200 billion in additional U.S. goods and services over the next two years on top of the amount the PRC purchased in 2017. In 2017, the PRC bought $130 billion in U.S. goods and $56 billion in services, according to U.S. Bureau of Economic Analysis data.
4. The USTR statement on the trade deal notes that the agreement “requires structural reforms and other changes to China’s economic and trade regime in the areas of intellectual property, technology transfer, agriculture, financial services, and currency and foreign exchange. The Phase One agreement also includes a commitment by China that it will make substantial additional purchases of U.S. goods and services in the coming years. Importantly, the agreement establishes a strong dispute resolution system that ensures prompt and effective implementation and enforcement.”
U.S. Trade Representative Lighthizer told reporters that the PRC’s commitments on intellectual property include areas like counterfeiting, patent and trademark issues and pharmaceutical rights.
6. U.S. Trade Representative Lighthizer said that he and PRC vice premier Liu He are expected to sign the “phase one” trade deal in early January, and the deal will come into force 30 days after the signing.
7. U.S. President Donald Trump tweeted on Dec. 13, “We will begin negotiations on the Phase Two Deal immediately, rather than waiting until after the 2020 Election.” A day earlier, some U.S. news outlets had reported that the Trump administration was delaying further trade negotiations until after the 2020 U.S. presidential election.
Key information about the trade deal released by the PRC includes:
1. Five vice ministerial-level officials held a press conference to announce details about the “phase one” trade deal. The officials are vice minister of commerce Wang Shouwen, agriculture and rural affairs vice minister Han Jun, foreign affairs vice minister Zheng Zeguang, finance vice minister Liao Min, and National Development and Reform Commission vice chair Ning Jizhe.
2. Xinhua was the only PRC media outlet who reported on the trade deal press conference. On Dec. 13, no other PRC media reported on the trade deal and no commentary pieces were written about it.
3. During the press conference, the PRC officials said that China will purchase more goods and services from the U.S. but did not provide the details which the U.S. side made public. They also mentioned but gave no details on commitments concerning intellectual property, technology transfer, agriculture, financial services, and currency and foreign exchange.
4. On the topic of agricultural purchases, agriculture and rural affairs vice minister Han Jun said that the PRC would “fully implement the consensus reached by the two heads of state in Argentina and Osaka.” Han did not mention the details about agricultural purchases which the U.S. side made public.
5. On the topic of tariffs, finance vice minister Liao Min said that canceling tariffs is “core to China’s concerns in the trade negotiations” and that the U.S. has “promised to cancel some planned and implemented tariffs, and will step up waivers granted to Chinese imports.” Liao did not mention the details about tariffs which the U.S. side made public.
6. The PRC officials said that the “next step” would be the translation and legal review of the trade agreement “as soon as possible.” Specific arrangements for the formal signing will also have to be arranged. In contrast, U.S. Trade Representative Robert Lighthizer said that he would be signing the “phase one” trade deal with vice premier Liu He in early January.
7. The PRC officials did not mention anything about subsequent trade negotiations. In contrast, President Trump said that “Phase Two” negotiations would begin “immediately.”
Our take:
1. From publicly available information on the “phase one” trade deal, it seems that the Chinese Communist Party would gain a slight edge over the United States in the Sino-U.S. “Battle of Waterloo” if the deal is signed.
We wrote in May that the CCP is “notorious for pulling off delaying tactics when its survival is at stake. Delaying tactics buy the Party breathing space and allow it to stay in the game against overwhelming odds.” Since the Trump-Xi meeting in Argentina in December 2018, the CCP has managed to delay the implementation of U.S. tariffs on all Chinese products and has gotten the U.S. to “settle” first for a “phase one” deal which President Trump described as being “about 60% of the total deal” instead of a complete trade agreement. While the CCP regime still faces more U.S. tariffs in December 2019 as compared to December 2018 (an additional 15 percent on $120 billion worth of Chinese goods and tariff rate increases on $250 billion of Chinese products), the current situation is preferable to a full-blown trade war that would be disastrous for the rapidly deteriorating Chinese economy.
Two aspects of the “phase one” trade deal, increased agricultural purchases and the removal of barriers for financial services, could benefit the CCP’s short-term survivability. The “opening up” of China’s financial sector to the U.S. could help the communist regime with its dollar shortage and grow its foreign exchange reserves, which have come under pressure because of the trade war. Buying more agricultural and farm products from the U.S. would help the PRC tackle its food crisis (see here and here for previous analyses); the CCP would likely want to increase pork supply, which was affected by the spread of African swine flu on the mainland, before the Lunar New Year in late January 2020.
2. The “phase one” trade deal is a political “Catch-22” for Xi Jinping, whose “quan wei” (權威) and grip on power is far less secure than popularly believed (see here, here, and here).
If the deal is signed, Xi’s political opponents and “hardliners” can accuse him of selling out the PRC amid a Sino-U.S. “new cold war.” More damningly, the Xi leadership would be essentially admitting to stealing intellectual property and making forced technology transfers, as well as agreeing to other aspects of the 150-page draft trade deal which the PRC “reneged” on in May, by signing the deal. Xi’s political rivals and Party “hardliners” opposed the draft trade deal back in May after they obtained translated copies of it; Xi will likely encounter similar, if not more, resistance after the 86-page “phase one” deal is translated and reviewed by the CCP elite. An ironic scenario for Xi would see him improve the Party’s survivability by “rescuing” or slowing down China’s economic deterioration with the “phase one” deal, but find himself either marginalized or ousted for failing to be sufficiently “politically correct” during a period of escalated geopolitical tensions with America.
If the deal is not signed, the Xi leadership faces the prospect of a full-blown trade war with the United States. A full-blown trade war could trigger explosive financial and debt problems in China and result in a severe economic crisis for the CCP regime. An economic crisis would in turn threaten the CCP’s political legitimacy, which it tied to economic performance since the 1970s, as well as substantially raise Xi Jinping’s personal political risks.
From Xi’s perspective, he has better odds of ensuring his own and the CCP’s survival by signing the “phase one” deal than rejecting it. Indeed, the unusual quiet and paucity of details from the PRC side in announcing the trade deal suggests that Xi plans to have the agreement signed; the more opaque the details of the agreement are to the Chinese public, the less Xi’s political opponents can use to attack him openly.
We believe that the CCP factional struggle is Xi’s greatest obstacle to signing and implementing the “phase one” trade deal. To prevent a repeat of the “reneging” in May, Xi must “rein in” his political opponents. This could prove difficult for Xi because he does not presently appear to have enough “quan wei” to ram through his will; we wrote in October that “the Xi camp and the Jiang faction are locked in a stalemate; neither side has the confidence or the means to subjugate/overthrow the other.”
If Xi Jinping feels like he has sufficient “quan wei” and is willing to expose himself to even higher levels of political risk, he could begin to purge or sideline a handful of mid- to high-ranking officials in opposing factions to “kill the chickens to scare the monkeys” (殺雞嚇猴). Xi would likely use the six months of chaos in Hong Kong and the Wang Liqiang/Xiang Xin case as an excuse to target Hong Kong, intelligence apparatus, and even political and legal affairs apparatus officials who are associated with or members of rival Party factions. Hong Kong leader Carrie Lam, Hong Kong Liaison Office head Wang Zhimin (Wang can be considered to be in Xi’s camp, but could still be sacrificed), and Hong Kong and Macau Affairs Office director Zhang Xiaoming are all at risk; whether or not Zhang Xiaoming is removed will be a bellwether of how powerful Xi currently is. Investigations and removals could come as early as mid-December.
Based on our observation, however, there appears to be a stalemate in the CCP factional struggle. And if there is a stalemate, then Xi is not likely powerful enough to simply purge associates or members of rival factions without giving up something on his end. In this scenario, Xi and Party “hardliners” could come to a compromise to “preserve the peace”—Xi is “allowed” to go ahead with the “phase one” deal and purge officials in rival factions in the name of preserving the economy and ensuring regime survival, but his own allies must also be “punished” for the Xi leadership’s failure to negotiate better terms with the Americans (see the purge of Liu Shiyu). Should Xi strike such a bargain, then Liu He is the ally who is most at risk of being attacked and “sacrificed”; if Liu is to be “sacrificed,” he will unlikely be investigated but could announce his “retirement” for “health” and other seemingly innocuous reasons some time after he signs the “phase one” deal.
3. On paper, President Trump is the big winner of the “phase one” trade deal. For the price of rolling back and putting off the implementation of some tariffs, Trump has gotten the CCP to admit to what it denied in May (committing intellectual property theft and forced technology transfers), open up China’s financial sector, reach a deal on currency, make substantial additional purchases of U.S. goods and services, and enact a dispute resolution mechanism to ensure trade deal enforcement. Meanwhile, the U.S. government has clearly stepped up its confrontation with the PRC on several fronts, including ideology, military, technology, and human rights. Trump’s biggest headache, however, will be ensuring that the CCP lives up to its trade deal commitments—a conundrum that no one has yet been able to crack.
The Trump administration appears to be using the “phase one” trade deal as some sort of “trial balloon” to assess the CCP’s intent and ability to commit to a full deal. And if the CCP is proven to be unable to deliver on its promises, the design of the deal allows the Trump administration to back away from it and revert to tariffs without much political cost. However, the Trump administration is still at risk of being hit by a CCP “Pearl Harbor” attack (unrestricted warfare tactics), particularly if the “phase one” deal buys the Chinese economy sufficient reprieve before the 2020 U.S. presidential election.
Get smart:
The “phase one” trade deal is akin to a Band-Aid to keep trade talks going and hold together an increasingly strained Sino-U.S. relationship. Unprecedented political crisis in the CCP, however, threaten to rip off the “Band-Aid” at any moment. Businesses, investors, and governments must closely track CCP elite politics and the factional struggle to mitigate Black Swan risks and uncover hidden opportunities.
