June 1, 2020 / 1:51 PM / a month ago

'Lemon' or not, Trump stuck with Phase 1 China trade deal for now

WASHINGTON (Reuters) - U.S. President Donald Trump has little choice but to stick with his Phase 1 China trade deal for now despite his anger at Beijing over the coronavirus pandemic, new Hong Kong security rules, and dwindling hopes China can meet U.S. goods purchase targets, people familiar with his administration’s deliberations say.

FILE PHOTO: U.S. President Donald Trump shakes hands with Chinese Vice Premier Liu He during a signing ceremony for "phase one" of the U.S.-China trade agreement in the East Room of the White House in Washington, U.S., January 15, 2020. REUTERS/Kevin Lamarque/File Photo

The U.S.-China trade negotiations took more than two years, heaped tariffs on $370 billion of Chinese products, whipsawed financial markets and dimmed global growth prospects well before the coronavirus outbreak crushed them.

In recent weeks, suggestions that Trump may cancel the deal have emanated from the White House almost daily, and businesses, investors, and China trade watchers are hanging onto every word and tweet.

But on Friday, when Trump said the United States would start dismantling trade and travel privileges for Hong Kong, he did not mention the deal. Stock markets heaved a sigh of relief, with the S&P 500 reversing losses.

Talking tough on China and criticizing the Obama administration's more measured approach is a key part of Trump's re-election strategy. Sticking with the pact may mean accepting that China is likely to fall short of purchase commitments for U.S. agricultural goods, manufactured products, energy and services - goals that many said were unrealistic here even before the pandemic.

In response to Trump’s Hong Kong announcement, China told state-owned firms to suspend large-scale farm purchases including soybeans and pork, people familiar with the matter told Reuters.

Such a halt will put China further behind in making good on its pledges to boost U.S. purchases by $200 billion over two years.

But canceling the deal would reignite the nearly two-year U.S.-China trade war at a time U.S. unemployment is at its worst since the 1930s Great Depression.

The next U.S. step would likely be reviving previously planned but canceled tariffs on some $165 billion worth of Chinese consumer goods, including Apple Inc cellphones and computers, toys and clothing - all ultimately paid by U.S. companies and passed on to consumers. Beijing would retaliate with tariffs on U.S. goods, fueling more market turmoil and delaying recovery.

“He’s stuck with a lemon. He gets an empty agreement if he sticks with it, and he gets more actions that create an economic drag and more volatility if he abandons it,” said one person briefed on the administration’s trade deliberations.

U.S. goods exports here to China in the first quarter were down $4 billion from the trade war-damaged levels a year earlier, according to U.S. Census Bureau data.

The Peterson Institute of International Economics estimates here that during the first quarter, China made only about 40% of the purchases it needed to stay on target for a first-year increase of $77 billion over 2017 levels, implying an extremely steep climb in the second half.

Leaving the deal now would not buy a lasting political bounce for Trump in manufacturing-heavy swing states with five months to go before the presidential election, analysts say.

COMPLEX RELATIONSHIP

Trump said on Friday that China was “absolutely smothering Hong Kong’s freedom,” but refrained from harsh sanctions that could put the trade deal in jeopardy, taking milder steps to revoke the territory’s separate travel and customs benefits from China.

Claire Reade, a former U.S. trade negotiator, said Trump’s “peripheral steps” would not deter Beijing from proceeding with the security law, as it regards Hong Kong as a core national security issue.

“Probably the most significant thing from the trade perspective is that the Phase 1 trade deal is – for now anyway - unaffected,” said Reade, senior counsel with Arnold and Porter law firm in Washington.

U.S. Trade Representative Robert Lighthizer has recently cited here "continuing progress" in the deal, after China welcomed U.S. blueberries, barley, beef and dairy products.

FILE PHOTO: U.S. President Donald Trump makes an announcement about U.S. trade relations with China and Hong Kong as National Security Advisor Robert O'Brien, Secretary of State Mike Pompeo and Treasury Secretary Steven Mnuchin listen in the Rose Garden of the White House in Washington, U.S., May 29, 2020. REUTERS/Jonathan Ernst/File Photo

U.S.-China flashpoints on Hong Kong, Taiwan and other issues did not derail negotiations that resulted in new concessions from China, said Jamieson Greer, who served as Lighthizer’s chief of staff until April.

“Some of these security and human rights challenges have certainly complicated the atmosphere, but the trade agreement can still provide a set of rules governing important aspects of the trade relationship,” said Greer, now an international trade partner at the King and Spalding law firm.

Another person familiar with USTR thinking said the agency “needs to make Phase 1 look good. They want to show that progress is being made. The president looks at the China relationship much more broadly.”

Additional reporting by Andrea Shalal; Editing by Heather Timmons, Chizu Nomiyama and Lisa Shumaker

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