Since the phase one trade deal between China and the United States was inked on 15 January, much of the commentary has focussed on the overly ambitious targets for Chinese purchases of US goods. Critics charge that the deal amounts to ‘managed trade’ or ‘central planning’ that substitutes government diktats for market forces.The real danger of the new agreement, however, is that it replaces a trading system based largely on agreed rules with one based purely on negotiating muscle. The United States long championed a rules-based system, but is now discarding it in favour of a power-based system where the strong do what they can and the weak suffer what they must.
Weakening rules put smaller economies — such as Canada, Australia, the ASEAN nations and Latin America — in an increasingly vulnerable position. Despite some happy talk of revitalising the World Trade Organization (WTO) at the gathering of business and government leaders at Davos on 20–24 January, prospects for shoring up multilateral rules look grim. In a world of bilateral negotiations, smaller countries will no longer have the protective umbrella of those rules, and will at best be able to cut unbalanced deals with the big players like the United States, China and the European Union.
The phase one deal, negotiated after months of escalating tariffs by the United States and measured retaliation from China, is a glimpse of that future. It is long on measures that favour the United States but disadvantage other countries. The heart of the deal is a commitment by China to purchase an additional US$200 billion in imports from the United States over the next two years. China was unlikely to meet those targets, even without the recent disruption caused by the spread of the coronavirus, and the only way it can get close is by diverting purchases — buying US rather than Brazilian soybeans, for example, or US rather than Australian beef.
Recourse for the affected countries will be limited. They can complain to the WTO that the China–US deal violates the core principle of non-discrimination in trade, but neither the United States nor China is likely to pay attention to a WTO ruling. The death of the appellate body — after the United States vetoed new appointments — effectively gives large countries a veto on WTO panel rulings. Any decision can now be blocked, and smaller countries cannot risk retaliating against bigger ones without the cover of a WTO decision.
Reforms that would have benefitted all of China’s trading partners, such as limitations on Chinese industrial subsidies or restrictions on state-owned enterprises, have been left to phase two of the negotiations. But expectations for a second round are already low. US President Donald Trump indicated that any deal must wait until after the November US elections. Since China withstood tariffs on three-quarters of its exports to the United States without agreeing to such reforms, it is hard to see how the Trump administration can bring enough pressure in the future to force a change.
Canada is a good case study in the dangers that await as international rules erode. Hearings began on 20 January in Vancouver in the extradition trial of Meng Wanzhou, the Chief Financial Officer of the Chinese telecoms giant Huawei, who is wanted in the United States on allegations that the company violated US sanctions on Iran.
Amid scrutiny of the phase one agreement, the hearings drew little notice. The Trump administration has scarcely paid attention despite Chinese retaliation against Canada, which has included jailing two Canadian citizens and cutting off US$2 billion in Canadian canola imports. Trump’s only public comment has been that he might intervene if he thinks it would help secure a better trade deal with China.
The Huawei case in Canada shows just how vulnerable smaller countries have become. Meng was arrested in Vancouver over a year ago at the behest of US authorities, by a Canadian government determined to abide by the rules of its extradition treaty with the United States.
In the past, China’s furious retaliation would have been met with a vigorous response from the United States in support of its Canadian ally. But the Trump administration has looked the other way, leaving Canada in the impossible position of choosing between meeting its obligation to the United States and weathering Chinese retaliation, or cutting a deal with China to release Meng and infuriating the United States.
In the new global trade regime, every country will now face similar dilemmas. The United States is pressing other countries to stop all business with Huawei. They must decide whether to oblige and face Chinese retaliation, or refuse and anger the United States. Many countries, including Canada and the United Kingdom, are looking at new taxes on digital companies. But the United States has warned — using France as the example — that it will slap unilateral sanctions on any country that tries.
Without a clear and generally agreed upon set of global trade rules, every trade issue is now up for negotiation. In such negotiations, the bigger countries usually get their way. The phase one deal with China is a taste of things to come.
Edward Alden is the Ross Distinguished Visiting Professor at Western Washington University and Senior Fellow at the Council on Foreign Relations.