A faltering U.S.-China trade deal is now the nations' strongest link

[August 14, 2020]  By Andrea Shalal, David Lawder and Yawen Chen

WASHINGTON/BEIJING (Reuters) - Top U.S. and Chinese trade officials are expected to recommit to a Phase 1 trade deal during a review on Saturday, even though China's promised purchases of U.S. exports are far behind schedule.

Current and former U.S. government officials and trade experts in both countries say the Phase 1 deal, signed in January after nearly two years of tit-for-tat tariffs and angry rhetoric, is the one area where the world's two largest economies are still cooperating.

The Trump administration has sanctioned companies and individuals linked to a security crackdown in Hong Kong and human rights, banned a Chinese owned video app, penalized Chinese academics and closed Beijing's consulate in Houston in recent months.

Beijing has responded by closing the U.S. consulate in Chengdu and sanctioning some members of Congress.

Despite the escalating conflict, the Phase 1 trade deal won't be dismantled, U.S. officials say.

"They have said they intend to implement the plan and we are engaged with them," White House economic adviser Larry Kudlow said Thursday. "We have big differences with China on other matters, but regarding the Phase 1 trade deal, we are engaging."

Chinese trade advisors say the slowing of both economies because of coronavirus-related lockdowns has made it difficult to meet purchase targets, but they don't expect the White House to walk away.

"Being able to sit down and communicate with each other is a good thing," said a Chinese state think tank economist who has advised Beijing on the trade deal, while cautioning there was little optimism about further trade breakthroughs.

"It's hard for things to get even worse, while a best case scenario is hard to achieve," said the economist, who spoke on condition of anonymity. "How can flowers grow in such a bad environment?"

China is falling far short of a promised additional $77 billion in purchases of U.S. farm and manufactured products, energy and services, although it has ramped up purchases of U.S. farm goods including soybeans and corn in recent weeks.

Imports of farm goods have been lower than 2017 levels, far behind the 50% increase needed to meet the 2020 target of $36.5 billion.

Beijing has bought only 5% of the energy products needed to meet the Phase 1 first year goal of $25.3 billion.

How to close or explain away this gap will be the biggest challenge for U.S. Trade Representative (USTR) Robert Lighthizer and Chinese Vice Premier Liu He during Saturday's video call.

U.S. and Chinese flags are seen before Defense Secretary James Mattis welcomes Chinese Minister of National Defense Gen. Wei Fenghe to the Pentagon in Arlington, Virginia, U.S., November 9, 2018. REUTERS/Yuri Gripas

BEST OF A BAD SITUATION

Trade experts said there is little political upside for U.S. President Donald Trump to abandon the deal at this stage, which would admit one of his biggest trade initiatives - already being hammered by Democratic rival Joe Biden - had failed.

And even some Trump administration officials have been wary of reigniting a tariff war that would roil markets and likely knock down the S&P 500 <.SPX>, which traded close to record highs this week.

"At the moment, the agreement serves the interests of the Trump administration and Chinese leaders," said former acting USTR Miriam Sapiro, now a managing director at communications firm Sard Verbinnen, adding the requirements set in the deal were "never realistic."

Trump, who has said the trade deal no longer means as much to him because of China's handling of the coronavirus pandemic, has expressed support for the deal this week, saying it should continue and purchases should surge in 2021..

Stephen Vaughn, former USTR general counsel and a legal architect of punitive tariffs on Chinese goods, said compliance with the deal also benefits China by keeping its U.S. relationship from deteriorating further. Now that its economy is recovering strongly from the coronavirus pandemic, Beijing has little excuse not to ramp up its purchases, he added.

"I don't see what China would gain from a failure to comply. My guess is that will not happen," said Vaughn, a trade partner with the King and Spalding law firm in Washington.

Claire Reade, a former USTR official and senior fellow at the Center for Strategic and International Studies, said the agreement does offer some incremental progress for U.S. firms seeking access to the lucrative Chinese market.

"If the administration lets the Phase 1 deal die, it becomes difficult to justify the pain caused by the lengthy trade war," she wrote in an essay this week.

Nearly 90% of firms surveyed by the U.S.-China Business Council have a positive view of the trade deal, but only 7% say its benefits outweigh the costs of tariffs incurred along the way.

(Reporting by Andrea Shalal and David Lawder in Washington, Yawen Chen in Beijing. Additonal reporting by Sophie Yu in Beijing. Editing by Heather Timmons and Lincoln Feast.)

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