U.S.-China Trade War: Phase One Agreement and Self-Enforcing Contracts

Sino-American bilateral trade relations have increased significantly in the past four decades since China started its economic reforms in 1978. The bilateral expansion in trade has been accompanied by increased complexity and tensions, which emerged in the form of a trade war during the President Trump administration. After a series of tit-for-tat tariff increases, in an attempt to address concerns through negotiations, both sides reached a Phase One agreement. However, the commitments made in the agreement were not delivered. In my thesis, I use the “self-enforcing contracts” theory to analyze the status of Phase One deal. The examination indicates that the agreement lacks components of self-enforcing contracts, providing players with other profitable strategies. The thesis digs deep into the causes of the U.S.-China trade imbalance as one of the main drivers of the trade war. It concludes that addressing the U.S. trade deficit with China needs structural policy changes and cannot be solved through arbitrary trade expansion commitments made in the Phase One agreement