The US-China trade deal: How the EU and WTO lose from managed trade

The authors analyze the economic consequences of the Economic and Trade Agreement (ETA) between China and the USA, also referred to as the Phase-I Deal, which was signed on January 15, 2020. It is a highly asymmetric treaty which commits China to open its markets and to purchase large quantities of US products in order for the US to refrain from imposing additional punitive tariffs. It requires Chinese imports of certain US goods to increase by about 95 bn USD in 2021 relative to the 2017 baseline. The authors show that compared to a 2021 benchmark without a US-China trade war and without the ETA, the EU is likely to lose about 11 bn USD in exports to China. The largest negative effects for the EU are expected in aircraft, vehicles, industrial machinery, optical and medical machinery, pharmaceuticals, and agricultural goods. The country in the EU most strongly affected by the possible trade diversion effects is Germany. They conclude that the ETA is very unlikely to be compatible with WTO law, because it violates the most-favored-nations principle and fosters managed trade thus undermining the multilateral trading system.