Phase One Trade Deal

Even by Washington standards, last Wednesday was a strange day. At the White House the President was strutting his stuff, playing host to the crème de la crème of U.S. industry and finance at a ceremony for the signing of a phase one trade agreement with China. Across the Mall, the House of Representatives was debating the resolution of impeachment it was planning to send to the senate. Satisfied smiles at the White House by Trump supporters, frothing rage at the House by Democrats unable to contain their hatred of Donald Trump.

On 11 December 2001 China was admitted to the World Trade Organization. It solemnly promised to end its practice of forcing foreign firms to turn over their technology in order to be granted access to its market. It solemnly promised not to require foreign firms to take on a Chinese partner. It solemnly promised to prosecute Chinese firms that stole trade secrets. On 12 December China, having obtained President Clinton’s support for its membership application, began violating its agreements. Successive American presidents — Clinton, Bush 2, Obama — chose not to remind successive Chinese regimes of those commitments.

Flash forward to 15 January 2020 and my conclusion that it is premature to pop the champagne corks. China agreed to buy an additional $200 billion of American goods (above 2017 levels) by 2021, goods that it desperately needs, and received from President Trump a halving of the 15% tariffs on $120 billion of its goods and a postponement of plans to raise tariffs on other products. He did retain tariffs on $370 billion of Chinese goods. Trump also harvested a new crop of the same old promises. “We’ve had the Chinese agree in this public fashion to things we think were important before, and it hasn’t made a difference,” says Derek Scissors, resident scholar at the American Enterprise Institute. A more optimistic Lindsey Group calls the deal “ambitious … creative.” But adds, “Of course, the proof is in the implementation.”

The principal goal of the tariffs, for which most economists agree American consumers have paid dear, was to force China to stop subsidising its industries. The regime pours billions into inefficient state-owned enterprises that flood the market with products at prices that unsubsidised U.S. firms cannot meet. It also is providing the industries of the future with unlimited resources to enable them to dominate the world markets. “The deal does absolutely nothing to curtail China’s subsidies to its manufacturers,” grouses Scott Paul, president of the Alliance for American Manufacturing.

That makes phase one, which Trump calls “a big, beautiful deal”, a defeat for the U.S., although not for Trump, who has engineered an export boom during the run-up to the November elections. Of the $200 billion of purchases, if indeed they materialise, which informed observers doubt, $32 billion will benefit soy bean farmers in swing states that handed Trump a win in 2016, and $53 billion natural gas producers in producing states such as Texas. The sales, if consummated, could add a few tenths of a percentage point to the nation’s economic growth rate, assuming the affected industries have the capacity to produce all the goods the Chinese have promised to buy, which, at least in the case of agriculture, is not certain.

Before American producers plan to spend the expected revenue, they should take a careful look at the agreement. China’s negotiators built in a loophole so large that you can drive a tractor through it. The agreement specifies that China’s purchases must be “based on commercial considerations”. If other countries offer prices or delivery terms that U.S. producers cannot meet, China is free to take its order books to the lowest-cost supplier. That will surely be the situation in natural gas markets, since nothing in the agreement requires China to remove its 25% tariff on natural gas imported from the United States. Besides, all sales contain many features: evaluating which offer is the best from the point of view of the buyer involves the exercise of judgement.

On the plus side, the dispute resolution mechanism is more favourable to the U.S. than the WTO process. And the truce in the trade war might, only might, persuade corporate executives to make the investments they have been deferring until the trade picture comes into clearer focus. All in all, Trump believes phase one will both boost the economy and convince voters that “Unlike those before me, I kept my promise”.

Xi Jinping, who sent a low-level functionary to the signing ceremony, can reasonably also claim victory. He has room to manoeuvre around his purchase promises. He has not been forced to abandon the subsidies that pave the road on which China is marching to global dominance. Nor has he agreed to make changes in China’s laws governing intellectual property. He has procured the supply of soy beans needed to satisfy his people’s need for protein, and pork to replace supplies lost to a swine flu epidemic. And he can now stall further negotiations while he awaits the results of the American elections in November.

Unfortunately for those sighing with relief at the new truce, Trump has already launched a new battle in the broader trade war. Two days before the President took his victory lap, Phil Hogan, the new EU trade commissioner arrived in Washington to meet the officials who advise the President on trade policy.

He lands as Trump is considering tariffs on European automobiles, to match those the EU levies on U.S. autos. He is considering 100% duties on French luxury goods in response to the 3% tax France is planning to levy on the profits of American high-tech companies. Rumour has it that Britain will soon join France in antagonising Trump.

Why prime minister Boris Johnson, for whom Trump has expressed a fondness and who is eager for a trade deal with the U.S. (16.2% of Britain’s exports), would side with French president Emmanuel Macron, whom Trump detests, is something of mystery to Britain’s many friends in America, who favour a post-Brexit trade deal. They believe Boris and The Donald have more in common than a penchant for peculiar, if very different arrangements — carefully coiffed vs. equally carefully mussed — of their blonde tresses.