Key takeaways

China will not fulfil its obligations under the ‘Phase One’ trade agreement with the US. This is primarily the result of already weakening trade figures from successive tariff hikes prior to Phase One and the subsequent economic impact of Covid-19.

There is a heightened risk that the deal will collapse altogether amid worsening US-China relations. Domestic economic considerations could constrain the actions of both Beijing and Washington in such an event. However, there is a high risk of cascading retaliatory actions from both sides that would pose significant political risks to US businesses and investors with commercial interests in China.

With fraught bilateral ties showing no sign of improvement, there is a high probability that fresh trade negotiations between Beijing and Washington will not take place until 2021. The outcome of the November US presidential election will be a notable factor in determining how future trade negotiations proceed and the associated risks to businesses on both sides of the Pacific.

In the long term, American companies will have to navigate an increasingly complex geopolitical risk landscape in China with regard to the growing bilateral rivalry, in order to protect their business operations and the interests of their shareholders and staff.

What is and is not covered in the Phase One deal?

China and the US signed the ‘Phase One’ trade agreement on 15 January 2020, which led to a temporary truce in the trade war. The deal contains partial tariff rollbacks, expansions of trade purchases, and commitments from both sides on intellectual property (IP) rights, technology transfers, and currency practices. The crux of the agreement centres around Beijing’s commitments to expand purchases of certain US goods and services, valued at USD 210.9 billion in 2020 and USD 257.5 billion in 2021. Notably, Beijing agreed to increase imports from the US by USD 200 billion over the next two years, compared to the 2017 benchmark, with manufactured products, agricultural, and energy commodities featuring heavily in the deal.

While the Phase One deal had set out specific targets seeking to address the imbalance in trade volumes, the agreement fell short of tackling the perceived discriminatory and restrictive policies
enacted by Beijing – one of the key issues that has long irked US President Donald Trump. Underscoring US concerns over cyber security, intellectual property, and data privacy, Washington has stepped up its scrutiny of Chinese companies, especially in the technology sector. Indeed, US authorities officially designated Huawei and ZTE as national security threats on 30 June, effectively
banning US telecoms firms from spending federal subsidies on either of the Chinese tech giants’ equipment. Furthermore, US President Donald Trump has instructed the Presidential Working Group on Financial Markets to provide recommendations on protecting investors from fraudulent practices of Chinese companies listed in the US….

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