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China Moving Towards Ending “Phase One” Trade Deal, Is Trade War Back On The Menu?

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China Moving Towards Ending "Phase One" Trade Deal, Is Trade War Back On The Menu?

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China is reportedly moving towards ending the “Phase One” Trade deal with the US.

The Chinese government appears to be walking back on the deal, reportedly telling state-owned agricultural firms to halt purchases of U.S. soybeans, one of the major U.S. agricultural exports to China and a pillar of the deal’s promised $200 billion in extra exports.

Beijing’s decision followed the May 29th U.S. announcement that Washington will potentially take steps to revoke Hong Kong’s special status and possibly levy sanctions and other economic weapons against both China proper and the once-autonomous region.

State-owned traders Cofco and Sinograin were ordered to suspend purchases, according to an unnamed source of Bloomberg.

Chinese buyers have also canceled an unspecified number of U.S. pork orders, one of the sources claimed.

Chinese Premier Li Keqiang vowed in May that China would implement the trade deal, however, rising tensions in regard to Hong Kong, plus Washington’s continued accusations towards Beijing in regard to COVID-19, and weapon sales to Taiwan, have strained relations significantly.

“We will work with the United States to implement the phase one China-U.S. economic and trade agreement,” Premier Li Keqiang told an annual gathering of lawmakers in Beijing on May 22nd. “China will continue to boost economic and trade cooperation with other countries to deliver mutual benefits.”

That vow appears to be in the past now.

“The market has already seen the deteriorating relationship between the China and the U.S. and many think that with the slow progress of Chinese commodity buying so far, the trade deal’s future was already in jeopardy,” said Michael McDougall, a managing director at Paragon Global Markets in New York.

Currently, analysts consider the deal as good as dead, and the only question now is what form of trade confrontation will take its place at a time when U.S. economic policy toward China is dictated less by long-term national interest and more by short-term electoral calculations.

“The locus inside the administration has moved from, ‘Should we drop the deal?’ to, ‘And then do what?’” said Derek Scissors, a China trade expert at the American Enterprise Institute who sometimes consults with the White House. “Trump wants to make sure that [prospective Democratic presidential nominee Joe] Biden can’t outflank him on China. But that dramatic action, if there is any, is going to have costs.”

Since the phase-one deal delivered a truce to growing U.S.-China tensions, what would it mean when it ends?

“The ‘phase one’ deal’s importance to the overall relationship is relatively small. It’s not the anchor that some thought it could be,” said Scott Kennedy, a China expert at the Center for Strategic and International Studies, who described the status of the trade deal—if reports of Chinese orders to halt purchases are confirmed—as “hanging by a thread.”

“The deal itself cannot stabilize the relationship, but if you remove the deal, then that is further evidence that both sides are throwing up their hands and see the relationship in purely competitive terms with nothing on the other side of the scale,” Kennedy said.

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