Among the abject failures of U.S. foreign policy in recent years, a notable one is the so-called U.S.-China Phase One trade deal, which quietly expired on the last day of 2021. Perplexingly, it appears the new administration is still trying (unsuccessfully) to convince China to meet its commitments even though the flawed deal has expired.
The Phase One trade agreement is a textbook example of how the U.S. managed to create leverage, lost it, muddled along, and ended up worse off. It’s time for the U.S. to abandon the deal and determine how to rebuild leverage with China and other trading partners through a strategic trade policy geared at supporting U.S. competitiveness.
When the U.S.-China Phase One deal was inked in January 2020, the agreement served a single purpose — to fulfill the Trump administration’s desire to simply have a deal.
It was not structured to yield the massive structural changes needed in China’s trading posture with the U.S. and the world, nor in its economic model. In fact, China was given the luxury of reaffirming prior commitments such as intellectual property and forced technology transfer, of which China in the end barely met 60% overall.
Specifically, China purchased 62% of the manufactured products, 76% of the agricultural products, and only 47% of the energy products it committed to under the deal. China’s purchases declined 16% for items not covered by the agreement yet which account for nearly 30% of U.S.-China trade.
With all the initial hype around the deal by the Trump administration and the Biden administration’s subsequent embrace of the deal, why did neither Trump nor Biden enforce it? Because the deal contained no real mechanism for enforcement and China held all the leverage.
While President Trump admittedly brought China to the table in a way that no prior administration had been willing or able to do, China understood that Trump needed a deal politically. Beijing played along while knowing the deal was costless and would never be realized.
The agreement did include a political escalation path, but neither U.S. administration exercised its options. Most likely the Trump administration wanted to avoid an admission of failure regarding one of its signature achievements.
One year in, the Biden administration remains unable to articulate a coherent China policy and its trade policy is hamstrung by U.S. political dynamics. Only recently have U.S. Trade Representative Katherine Tai and others in the current administration mentioned holding China to the deal.
This disastrous outcome has given China the upper hand in future bilateral dealings and has left the U.S. weakened. It confirms that, no matter how big the U.S. is, it cannot deal with the challenges that China poses to the international trading system alone. It has shown also that creating the unfortunate precedent of managed trade is not a winning strategy.
The Phase One deal was also a setback for everything the U.S. has fought so hard to espouse and underwrite in the last 70 years. U.S. leadership has been critical to the creation and functioning of a nondiscriminatory, open, and rule-based system that is consistent with U.S. values and that encourages American and global growth, and flows of people, ideas, investments, and trade. It can’t be overstated to what degree the agreement departed from prior U.S. practice.
The only way that the U.S. can emerge from this situation with grace and gain leverage with China and other trading partners is by having an actual global trade strategy.
A key tenet of U.S. trade policy should be to raise the costs of noncompliance by China and others and create incentives for constructive participation in, and compliance with, the global trading rules.
The U.S. needs to conclude high-standard deals on a multilateral, regional, or bilateral basis to raise standards and create accountabilities both inside and outside those frameworks. Deals should not be cut for political expediency without regard to consequences or precedent. They should be thoughtful exercises with the bottom line of bolstering U.S. competitiveness.
The U.S. should deepen its trading relationships with allies and like-minded countries through an aggressive free-trade agreement policy. The Biden administration’s efforts to kick off the U.S.-EU Trade and Technology Council and the Indo-Pacific Economic Framework are a good start, but need to go beyond simple executive agreements. These should be honored as free trade agreements — which requires working with Congress — and contain rules-based enforcement.
It’s time to move forward, learn from past mistakes and avoid the pitfalls of the U.S.-China Phase One deal.
Neena Shenai is a nonresident fellow at the American Enterprise Institute. She is also a global trade attorney in Washington, D.C.