When the world’s two largest economies and powers sit down to talk, the world waits to learn what they have agreed. The document signed by the US and China this week is an unusual international agreement, as it has no reference to independent arbitration and little external reference to world bodies, mentioning the IMF on currency but not giving the WTO any role in the decisions. The agreement has no end date but can be terminated 60 days later by either party unilaterally renouncing it. Both countries are keen to assert their sovereignty and to remind the rest of the world of their power.
The agreement is, in part, very detailed. It sets out a comprehensive system of recognising and protecting intellectual property and requires China to produce a plan within a month to meet the principles and standards set out. It asserts that the US already does just that. It requires both parties to refrain from pressing or requiring companies to transfer technology when they become overseas investors in the other’s territory in language which is directed against China. It offers much more open access to China’s financial services and banking markets, with specific pledges to allow US electronic payments companies, US credit rating companies and agencies and US asset managers better access to the Chinese market. The document confirms that the US already allows such access to Chinese companies into America.
Currency accusations eased
The section on currency manipulation is more restrained. It opens by underlining the need to “respect the other party’s autonomy in monetary policy”. Pledges to refrain from competitive devaluation in accordance with IMF guidance are buttressed by transparency requirements to publish details of money growth, foreign exchange intervention, forward positions and the like. This already happens. There is no recent evidence of China trying to manipulate its currency down anyway.
The sixth and central part of the agreement for Donald Trump is the section on expanding trade. China promises to increase its imports from the US by the much-reported $200bn over the two years starting on 1 January 2020. This figure is broken down into targets for manufacturers, agricultural products, energy and services.
In energy, for example, the agreement states China will increase its purchases of oil, gas and liquids by $18.5bn in 2020 and by $33.9bn in 2021. This requires a steep increase in these imports from current levels, which will have an impact on existing suppliers into China. The section also contains a detailed breakdown by-products and services of what is eligible under the different general headings. The third section of the agreement lays down strong standards for food quality.
Given the exacting targets and the requirements placed on China to change its market environment in a number of crucial areas, dispute resolution is of interest. The agreement sets up a high-level Trade Framework Group led by the US Trade Representative and the relevant Vice Premier from China which will meet every six months for review. Each country will also set up a “bilateral evaluation and dispute resolution office”, with the two offices having regular working contacts with each other. If one country disagrees with actions of the other it sends a complaint to the other’s office. It has ten days to assess the complaint and 21 days to resolve it. If it is unable to, it goes upwards to a Deputy US Trade Representative and a Vice Minister, who have 45 days from the complaint to resolve it. If they fail to sort it out, it goes to the US Trade Representative and the Chinese Vice Premier.
If there is still no agreement “the complaining party may resort to taking action based on facts provided during the consultation, including by suspending an obligation under this agreement or by adopting a remedial measure in an appropriate way”. If the other party is still unhappy its ultimate response is to withdraw from the whole agreement.
Easy to end
So, the whole agreement rests on mutual goodwill. There is no external adjudicator, and the parties are not bound to a solemn treaty with a long and difficult route to exit. As many of the duties rest on China it means the whole agreement is dependent on China continuing to think this makes sense.
China is likely to view this through the prism of its wider political interests and disagreements with the West. Markets will have to live with continuing uncertainties over this fundamental relationship for the world economy.
The dangers lie in the possibility that the US comes to think China is not delivering enough on purchases of US goods or has not changed her behaviour sufficiently on intellectual property, or in China finding the requirements too onerous. For the time being, the fact that they have both signed up to this in public is a helpful sign that warrants the positive market moves ahead of the event that we have seen. For the time being, both countries clearly think this is in their interests.
The above article was previously published by Charles Stanley on 16th January 2020