China and US look to the future with IT trade agreement

Nov 19, 2014

China and the US on Tuesday reached an agreement that paves the way for the slashing of tariffs globally on high-tech goods and may mark the start of a new phase in the trade relationship of the world’s two largest economies.

The deal announced in Beijing by US President Barack Obama broke a deadlock of almost 18 months in negotiations over updating the World Trade Organisation’s 1996 Information Technology Agreement to include products such as video game consoles and next-generation semiconductors. Its larger impact, however, may be on the US and China’s broader economic and trade relations and how they work together in larger forums.

"This is encouraging news not just for the US-China trade relationship,” said Mike Froman, the US trade representative. “It shows that the US and China can work together to both advance our bilateral economic agenda but also to support the multilateral trading system.”

Much of the focus at the 21-country Asia Pacific Economic Cooperation forum’s meetings in Beijing that closed on Tuesday has been on the US and China’s strategic rivalry and what have been dubbed duelling Pacific trade agreements.

Xi Jinping, China’s president, called on APEC leaders’ endorsement on Tuesday of a plan to accelerate studies of a possible Free Trade Area of the Asia Pacific (FTAAP) a “historic step”. Mr Obama and his negotiators, meanwhile, devoted much of their energy in recent days to making progress on a Trans-Pacific Partnership (TPP) with Japan and 10 other economies that pointedly excludes China.

The agreement on IT goods illustrates another side of the relationship, however. Even as they circle each other strategically, the US and China appear eager to find ways to co-operate on deals with potentially quicker impact for business.

The global trade in IT products is worth about $4tn annually, according to US officials, and the ITA will affect $1tn of that trade when it comes into force. Tuesday’s deal between the US and China must still be approved by the more than 50 other countries involved in the ITA negotiations, but that is expected to happen within weeks.

In an interview with the Financial Times, Mr Froman said that the Obama administration had mounted a concerted campaign to convince the Chinese of the benefits from a deal, with officials from the president on down making the case for the ITA in recent months.

“There was a lot of engagement on this,” he said.

Mr Froman has pointed to the ITA as a litmus test for China and its role in other bilateral and “plurilateral” negotiations which have become the key components of US trade strategy in recent years.

The next test, Mr Froman said, would be China’s presentation early next year of the list of sectors it would like to exclude from an investment treaty with the US, negotiations for which began last year. That, he said, would be an “important indication” of how prepared China was to embrace economic reforms and open up its markets, particularly for services.

Since joining the World Trade Organisation in 2001, China has been a committed multilateralist and even an outspoken critic of the US push for regional agreements. But, over the past year, there have been growing signs that Beijing, too has become frustrated with the WTO and wants to join US-led plurilateral initiatives.

Beijing in January joined the launch of plurilateral discussions on the trade in environmental goods with the US, EU and other countries. In addition China has said it wants to join US-led negotiations over the $4tn-a-year global trade in services, something the US has repeatedly blocked citing the ITA stand-off.

Still, it is unlikely there will be an immediate sea change in trade relations between the US and China. Trade officials point out that China remains difficult to negotiate with and often relies on “action forcing events” such as APEC to overcome internal differences and politics.

China can also act erratically, as it did a year ago when it caused the ITA talks to collapse by seeking exclusions from more than 100 of the 250 or so product categories being addressed.

Even after Beijing, which is the largest global exporter of IT goods, drastically reduced its list of excluded products to a few dozen earlier this year it still seemed caught up in internal rivalries.

As recently as last week US officials were still expressing frustration with China. But over the past few days discussions resumed in Beijing and by Monday the two sides were exchanging final texts and translations of an agreement.

Source: FINANCIAL TIMES