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U.S.-China agreement steadies relationship in free-fall

Trade deal doesn't address future of 5G technology, industrial policies that have fueled frustrations in Washington.

By Bloomberg News

For Chinese President Xi Jinping, the phase-one trade deal with U.S. President Donald Trump isn’t exactly a reason to pop open the champagne.

After months of arduous negotiations, false starts and dashed hopes, the agreement announced on Friday night helps steady a relationship in free-fall. While that’s important for Xi, who has faced rumblings of discontent as the economy grows at the slowest pace in almost three decades and protests in Hong Kong rage with no end in sight, it’s at best a temporary respite.

The deal did nothing to address the swathe of industrial policies that have driven frustrations with China in Washington. Nor will it reduce the intensifying competition between the two sides over the future of 5G technology, geopolitical hot spots like Taiwan and the South China Sea, or Beijing’s hard-line policies in China’s far western region of Xinjiang -- all areas that Xi’s critics say could’ve been handled better.

“The party secretary has always been the prime custodian of the U.S. relationship, so its rapid implosion reflects poorly on Xi,” said Richard McGregor, a senior fellow at the Sydney-based Lowy Institute who wrote “The Party: The Secret World of China’s Communist Rulers.” “All he has been able to do is to fight the other side to a messy draw which hasn’t resolved any of the underlying rivalries. The two sides will inevitably clash again.”

For the moment, Xi can point to some positives. While the phase-one deal only reduced instead of rolled back tariffs as Beijing demanded, the suspension of future increases helps bring some certainty for investors who have seen Chinese exports to the U.S. fell in 10 of the 11 months this year. Several key economic data points for November came in stronger than expected, helping to boost stocks on Monday.

Charles Liu, a former economic negotiator with the Chinese delegation at the United Nations and founder of Hao Capital, said the deal will help put a lid on the trade-war inspired nationalism that would make compromise more difficult and hinder China’s long-term development plans. It would also help Xi rebut criticism about his more assertive foreign policy.

“The deal means that he can clearly show to the population that he’s attempting to form a more collaborative relationship with the United States,” Liu said. “There has been some domestic criticism for China coming out on the global front too aggressively too early. This helps to reduce that pressure.“

But China is well aware that major hurdles remain, a sentiment reflected in coverage of the deal by state-run media outlets that played down the deal while noting that it might stabilize the economy. Hu Xijin, editor of the Global Times newspaper, noted that China “felt the strength of the U.S.” throughout the trade war and called on both countries to respect each other to avoid “a cruel strategic clash.”

The most likely immediate flash point is the future of 5G and the fate of Huawei Technologies Co., China’s flagship tech company. The Trump administration has already hit it with sanctions and sought to prosecute its chief financial officer. Now both the U.S. and China are racing to convince nations across the world to follow their lead, sometimes using threats: On Saturday, China’s ambassador to Germany threatened retaliation if Huawei was excluded as a provider of 5G wireless equipment.

On the ground, Chinese officials are preparing for the tech war to continue indefinitely.

“There is this impetus to decouple down to a very detailed level,” said Paul Triolo, head of global technology policy at Eurasia Group, who said China has sent officials to companies to understand their level of dependence on U.S. technology. “There seems to be resignation that the U.S. is not going to let up.”

There’s also no sign of geopolitical tensions easing, with officials from both nations increasingly noting that the conflict amounts to a clash of systems. At a briefing in Bangkok on Friday, Pacific Fleet Commander Admiral John Aquilino said the U.S. and China “have inherent disagreements between ideologies.”

Even if Trump wins re-election and moves to repair the relationship with Xi -- a big question mark -- the U.S. Congress has become increasingly hostile to Beijing. U.S. lawmakers voted overwhelmingly to pressure China over Hong Kong, and they are pushing for measures to address China’s detention of an estimated one million ethnic Muslim Uighurs in “re-education” camps.

China’s Foreign Minister, Wang Yi, voiced some of the country’s frustrations in a speech on Friday in which he accused the U.S. of “slandering China’s social system, development path and cooperation with other countries.” After the last round of talks broke down in May, Xi renewed calls for China to pursue “self-reliance” in key technologies and even called on citizens to join a “new Long March.”

These tensions are likely to resurface at a political level as soon as the two sides begin talking about a phase-two trade deal. While China is likely to insist that Trump drop all punitive tariffs, the U.S. is likely to ask for structural changes to China’s economy that wouldn’t be palatable to the nation’s hawks, according to He Weiwen, who previously served as a commercial attache at the Chinese consulates in New York and San Francisco.

“For China, this is a matter of sovereignty,” He said. “A phase two deal will be more difficult.”

--With assistance from Peter Elstrom, Yinan Zhao and James Mayger.
To contact Bloomberg News staff for this story:
Peter Martin in Beijing at pmartin138@bloomberg.net
To contact the editor responsible for this story:
Daniel Ten Kate at dtenkate@bloomberg.net
© 2019 Bloomberg L.P.
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