MNI EXCLUSIVE: Virus Ups Pressure On US-China Trade Deal

--Phase One begins to show cracks, Phase Two unlikely at any point, ex-officials

say

By Ryan Hauser

     WASHINGTON (MNI) - Phase One of the U.S.-China trade deal is showing signs

of strain under the economic fallout of Covid-19 as diplomatic relations sink to

their lowest level in decades, former U.S. trade officials told MNI this week.

     The relationship is at its lowest point since the 1989 Tiananmen Square

crackdown, said James Green, a former USTR minister counselor for the U.S.

Embassy in Beijing. Covid-19 has only fanned mutual distrust, adding yet

"another area for finger-pointing."

     "Even if there has been a phone call or two," Green said, "most

government-to-government communication has stopped between Washington and

Beijing."

     --PHASE ONE UNDER STRAIN

     "I'm seeing small cracks" in Phase One, said Clete Willems, a former Trump

NEC deputy director, though he added that the cascade of problems has not yet

become an "avalanche."

     Supply and demand shocks are likely to undermine purchasing commitments

with the provision of services in finance, cloud computing, and business travel

and tourism all suffering from slowing Chinese demand.

     In the U.S., farmers are starting to face labor and transportation problems

amid the lingering virus fallout, and Willems said concern is growing in the

White House over China's promised agricultural purchases, which some U.S.

economists described as ambitious even before Covid-19.

     Claire Reade, a former assistant U.S. Trade Representative for China

affairs, said energy purchases also pose a "significant challenge" to Phase One

as U.S. petroleum associations may not have enough oil to sell and as new export

controls on electronic products further hinder sales.

     China's new corporate social credit system may block U.S. firms' access to

Chinese markets, a trend that "threatens to usher in wide-ranging forms of

officially sanctioned discrimination against foreign firms," according to former

USTR official Jeff Moon. "China's past practice is to fulfill the letter of

US-China agreements without observing their spirit, thus denying foreign firms

the full benefits of bilateral agreements," he said.

     Chinese purchasing commitments made under Phase One "were always

ambitious," said former ambassador Craig Allen, president of the U.S.-China

Business Council. However, Allen noted that the deal runs for two years and that

"there will hopefully be enough time for a robust recovery and the fulfilment of

Chinese commitments."

     Kelly Ann Shaw, a former deputy director at Trump's NEC, told MNI there is

"every incentive on China's side" to comply with Phase One, adding that the U.S.

has already seen China begin to fulfil its purchases in agricultural goods and

liquid natural gas. Shaw said it is "too early to tell" if China will back out

of Phase One commitments and that the U.S. is now in a "wait-and-see posture."

     Others, however, said implementation has been "mixed" as Chinese financial

markets appear to have opened to U.S. investors on time even as China delayed

its release of a national plan to protect intellectual property rights. China

has also made some progress in eliminating non-tariff barriers to US

agricultural exports, Reade said.

     --PHASE TWO NEARLY SCUTTLED

     While some former Trump trade officials, like Shaw, are optimistic about

prospects for a Phase Two agreement after the November U.S. elections, most

former officials who spoke with MNI were roundly skeptical.

     Willems said Phase Two and further tariff reductions are "completely off

the table at this point," adding that "further productive trade talks" are

"almost impossible to envision."

     General Robert Spalding, a former senior Trump NSC official, was more

blunt, saying there's "zero chance" of a Phase Two agreement happening after the

election, since China would only pay lip service to structural reforms that

threaten its non-market system.

--MNI Washington Bureau; +1 202 371 2121; email: ryan.hauser@marketnews.com

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