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Why the Deal With China Amounts to More than a Hill of Soybeans

The temporary resolution was bound to be underwhelming, but it’s a blueprint for progress.

Harvesting soybeans in Indiana in November. The trade turmoil hit soybean farmers particularly hard. Credit...Bryan Woolston/Reuters

It would be reasonable to look at the new trade agreement between the United States and China and say: All that … for this?

The temporary resolution was bound to underwhelm after two years of rapidly escalating bluster and tariffs; a world of pain for American farmers and companies reliant on imports from China; and rhetoric suggesting the trade war was only the beginning of one of the great geopolitical clashes of our century.

China is going to buy a big pile of soybeans and other American agricultural and energy products, and promise not to steal from American companies that use advanced technology and want to do business there. The United States is going to refrain from further tariff increases.

There is plenty of triumphant talk from the Trump administration. “A momentous step, one that has never been taken before with China,” the president said at a crowded signing ceremony at the White House on Wednesday, “toward a future of fair and reciprocal trade.” Business groups have been supportive.

In the details, the agreement looks more like a temporary cease-fire than a lasting peace. Perhaps most important, this initial agreement does not reverse existing tariffs on $360 billion of Chinese imports, meaning the higher costs that many American companies have been grumbling about will remain. Instead, the deal prevents the arrival of a new round of tariffs that were originally set to start last month.

And there is even some doubt about whether the promised $200 billion in Chinese purchases of American products will be achievable. In particular, the $40 billion in planned agriculture purchases may stretch the capacity of American farmers to fulfill.

But if you put aside some of the grandest presidential promises, you can see some ways in which the deal does represent progress toward achieving a more stable relationship between the world’s two largest economies. You can see why it has contributed to a remarkable stock market surge in the last few months — a 12 percent rally in the S&P 500 since the start of October.

First, while the deal leaves existing tariffs in place, it makes sense that companies that do extensive business with China would feel a sense of relief. Companies can be remarkably flexible and adaptable, and a 15 percent tariff on many Chinese imports alone is the kind of thing that corporate supply chain managers can deal with. The reason the trade war stymied business investment during 2019 is that it’s a lot harder for a company to plan and invest during a never-ending escalation of tariffs and tension, with no visibility into how or when it might end.

Second, on the knottiest areas of negotiation — around Chinese theft of American companies’ technology — the deal aims to improve protections for intellectual property while not undermining China’s ability to compete in the advanced industries of the future.

In earlier language, the Trump administration almost seemed to want to remake the entire Chinese economic strategy, not merely to prevent Chinese companies from stealing from American companies. The Americans appeared to want to prohibit a state capitalism approach: state-subsidized so-called “national champion” companies in areas like aerospace, automobiles and semiconductors.

Throughout last summer, the two countries were deadlocked in part because the United States was essentially asking for things the Chinese could never agree to. In the last few months, there was more of a focus on where the Chinese had room for concessions.

The trade conflict appears to have made the Chinese more focused on developing its own technological advantages and less dependent on imports from the West. That has made them more open to changes.

“It’s ironic that the trade war, by heightening Chinese fears of being isolated from tech supply chains, has accelerated their drive to be self-sufficient,” said Mary Lovely, a senior fellow at the Peterson Institute for International Economics. “The means by which they accomplish tech transfer and acquisition may change as a result of today’s agreement, but their desire for it will not.”

Ultimately, with President Trump seeking re-election in 10 months and the Chinese economy showing signs of creaking, both sides had too much to lose from the open-ended escalation and were willing to do whatever they needed to stop it. That left room for the “constructive ambiguity,” as negotiators often call it, to allow both sides to proclaim victory.

“Trump never wanted to test the premise that the Dec. 15 tariffs wouldn’t actually hurt the U.S. economy, so he had strong incentive to use the definition of ‘deal’ as his ambiguity,” said Douglas Rediker, chairman of International Capital Strategies. “And China was desperate to avoid more tariffs and reduce existing ones. So getting to ‘yes’ was a common objective.”

Will this be a lasting trade peace? Will the Phase 1 deal lead to a Phase 2 deal, and a stable economic relationship between the two superpowers for decades to come? There are reasons to be doubtful, and a certain amount of tension — including the original Trump tariffs — looks likely to stay in place indefinitely. Neither Mr. Trump nor the Chinese president, Xi Jinping, can stomach any appearance of weakness to their domestic constituencies.

But the agreement signed on Wednesday buys time for all parties. It has already created a boost for markets, and signals the onset of a more realistic form of negotiations between the two countries than was evident over the summer, when the sides were very far apart.

Above all, the deal shows that these two powerful antagonists can achieve the basic steps of deal making, building trust as negotiating partners, respecting bright lines on each side, and allowing each other ambiguity. There is no guarantee the progress will be permanent; it could, as in previous months, be cast aside with a few presidential tweets. But it’s progress nonetheless.

Neil Irwin is a senior economics correspondent for The Upshot. He is the author of “How to Win in a Winner-Take-All-World,” a guide to navigating a career in the modern economy. More about Neil Irwin

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