U.S.-China Phase 2 trade deal unlikely: S&P trade analyst

(Reuters) - A more comprehensive trade deal between the United States and China is unlikely, a global trade expert said on Friday, adding that the recently agreed Phase 1 deal lacks teeth and is too ambitious in its scope.

FILE PHOTO: Chinese and U.S. flags are set up for a meeting during a visit by U.S. Secretary of Transportation Elaine Chao at China's Ministry of Transport in Beijing, China April 27, 2018. REUTERS/Jason Lee/File Photo

Chris Rogers, research analyst at S&P Global Market Intelligence’s supply chain analysis group Panjiva, said the countries will find it tough to address the core issue of the long-standing trade dispute - state support of enterprise in China.

In the near term, the United States may re-examine trade ties with other Asian countries as the presidential election nears, Rogers said.

Below are excerpts from the interview:

Q - Why did China sign the deal?

A - Simply put, they needed to stop the escalation in tariffs. China is already facing an economic slowdown and this has been a drag on exports.

China has made a ton of commitments to change policies on intellectual property, technology transfer and access to financial services but has not changed anything on bigger issues like state subsidies.

Chinese commitments to buying U.S. goods are very ambitious - nearly $200 billion extra in 2020/21 - and it relies heavily on the manufacturing sector and services and not just soybeans and LNG.

Most tariffs remain in place (only around 10% of the tariff take by dollar value is being cut) and, if anything, the U.S. economy is more dependent on China’s goodwill for ongoing exports than before.

The good news for intellectual property and financial services oriented firms is that the Chinese market has been pried open a little bit more than before.

Q - We’ve seen a lot of coverage detailing a pick up in investment in Vietnam due to the trade war. Do you think this trend is going to slow given we’ve reached the U.S.-China deal’s first phase?

A - Most companies that have discussed the trade war in their conference calls (we track over 7,500 of them) have said they are accelerating existing plans rather than implementing wholly new ones.

One reason for firms to be circumspect about investing in Vietnam (or elsewhere in Southeast Asia) is the risk of new tariff wars. Trump may be looking for new “convenient” enemies ahead of the elections.

That means the risk of further section 301 (of the Trade Act, 1974) duties. The Vietnamese and Malaysian governments have already expressed concerns in that regard.

Q - About Phase 2, if it does happen, do you see any concrete ground being covered?

A - I’m very skeptical about Phase 2 - certainly within the time-frame of the current year. The big outstanding issues that weren’t addressed in Phase 1 really speak to the heart of capitalism-with-Chinese-characteristics, namely, the support for state-owned firms and the system of state-directed enterprise.

Furthermore, the trade war isn’t really about trade, it’s about technological superiority. In that regard, the United States is becoming more, not less hostile.

What’s more likely is that Phase 2 will simply end up in biannual talks between Chinese Vice Premier Liu He and United States Trade Representative Robert Lighthizer.

Of course, if U.S. President Donald Trump is planning a visit to China there will have to be something to discuss. That will probably relate more to signing some long-term commercial deals (aerospace could be a big part of the phase 1 implementation) rather than fundamental policy change.

(The following are excerpts from a Reuters Global Markets Forum chat. To join the forum, click here here)

Reporting by Aaron Saldanha in Bengaluru, Divya Chowdhury and Savio Shetty in Mumbai; Editing by Saumyadeb Chakrabarty