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A faltering trade agreement between the United States and China is now the nations’ strongest link



WASHINGTON / BEIJING (Reuters) – Top US and Chinese trade officials are expected to resume a Phase 1 trade deal during a review on Saturday, although China’s promised purchase of US exports is far behind schedule.

FILE PHOTO: US and Chinese flags seen before Secretary of Defense James Mattis welcomes Chinese Secretary of Defense Wei Fenghe to the Pentagon in Arlington, Virginia, USA, November 9, 2018. REUTERS / Yuri Gripas

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

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, punished Chinese academics and closed the Beijing consulate in Houston in recent months.

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

Despite the escalating conflict, the Phase 1 trade agreement will not be settled, US officials say.

“They have said they intend to implement the plan and we are committed to them,” White House Financial Adviser Larry Kudlow said Thursday. “We have big differences with China in other matters, but as far as phase 1 trade is concerned, we are committed.”

Chinese trade advisers say the slowdown in both economies due to coronavirus-related closures has made it difficult to meet purchase targets, but they do not expect the White House to go 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 warning there was some 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 far below the promised additional $ 77 billion in purchases of U.S. farms and manufactured goods, energy and services, though it has increased purchases of U.S. agricultural products including soybeans and corn in recent weeks.

Imports of agricultural products have been lower than the 2017 level, well behind the 50% increase needed to reach the 2020 target of $ 36.5 billion.

Beijing has purchased only 5% of the energy products needed to reach the $ 25.3 billion first-year target.

How to close or explain this gap will be the biggest challenge for US Trade Representative (USTR) Robert Lighthizer and Chinese Deputy Prime Minister Liu He during Saturday’s video call.

BEST OF A BAD SITUATION

Trade experts said US President Donald Trump has suffered a political overhaul to abandon the deal at this point, which would admit that one of his biggest trade initiatives – already hammered by Democratic rival Joe Biden – had failed.

And even some of the Trump administration’s officials have been on guard against ruling over a customs war that would shake markets and likely knock down the S&P 500. SPPX, which traded close to record highs this week.

“Currently, the agreement serves the interests of the Trump administration and Chinese leaders,” said former USTR Miriam Sapiro, now CEO of communications firm Sard Verbinnen, adding that the requirements of the agreement were “never realistic.”

Trump, who has said the trade deal no longer means that 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 grow by 2021.

Stephen Vaughn, former director general of the USTR and a legal architect for punitive tariffs on Chinese goods, said compliance with the agreement also benefits China by preventing its US conditions from deteriorating further. Now that its economy is recovering strongly from the coronavirus pandemic, Beijing has little excuse for not increasing its purchases, he added.

“I do not see what China would gain from non-compliance. My guess is that it will not happen, ”said Vaughn, a trading partner with law firm King and Spalding in Washington.

Claire Reade, a former USTR official and senior staff member at the Center for Strategic and International Studies, said the agreement provides some step-by-step progress for U.S. companies seeking access to the lucrative Chinese market.

“If the administration lets the Phase 1 agreement die, it will be difficult to justify the pain caused by the protracted trade war,” she wrote in an essay this week.

Nearly 90% of the surveys surveyed by the UK-China Chamber of Commerce view the trade agreement positively, 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 Heather Timmons and Lincoln Feast.

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