President Trump signed his “big, beautiful monster” of a trade deal with China Wednesday.
Love it or hate it, the monstrous Economic and Trade Agreement Between the Government of the United States of America and the Government of the People’s Republic of China is, as the administration claims, “historic.”
The U.S., recognizing that Chinese ruler Xi Jinping is increasingly dictating economic outcomes, is moving away from free trade to managed trade. Accordingly, Trump got China to promise this year and next to make purchases of U.S. goods and services of at least $200 billion over what it imported in 2017. Much of the commitment involves agricultural products. Manufactured goods and energy products are included as well.
Some specifics of the purchase commitments are documented in a “confidential annex” to the agreement, U.S. Trade Representative Robert Lighthizer and Treasury Secretary Steven Mnuchin told Bloomberg News in a joint email.
The 86-page Phase One deal, as it is commonly known, includes intellectual property protections and rules against China requiring technology transfers as the price of admission to that country’s market. Beijing has also agreed to manage its currency transparently and to grant greater access to foreign financial services firms.
Disappointing to many, the deal includes no reductions in tariffs beyond those made in December. Last month, the United States did not go ahead with scheduled tariffs to be imposed under the authority of Section 301 of the Trade Act of 1974 as a remedy for the theft of U.S. intellectual property. Moreover, the administration cut in half 301 tariffs previously put on certain Chinese goods. Similarly, China did not go ahead with additional tariffs of its own that month.
There are mechanisms in the Phase One deal by which the U.S. can re-impose tariffs for noncompliance. Beijing is not permitted to retaliate for any proportional American snap-backs of tariffs made in good faith.
The parties have deferred other issues, like Beijing’s industrial subsidies and its cybersecurity rules, to a Phase Two deal. Many expect such discussions to be especially contentious, one of the reasons trade negotiations were split into two parts.
Separately, Washington and Beijing announced the resumption of the U.S.-China Comprehensive Economic Dialogue, twice-a-year talks. The Treasury Department on Monday took China off its list of currency manipulators.
President Trump calls the China deal a significant victory for America, but at best it is a truce. Moreover, it is a truce favoring China more than it initially appears. Beijing, before it inked the pact, got what it really needed.
First, the deal restored faith in China’s shattered economy. The country is not growing at the 6.1 percent pace analysts have pegged it at. In reality, growth is on a par with the United States—or slower. Business investment is stagnant, and consumer spending, despite rosy assessments, is not making up for sluggishness elsewhere. Bellwether car sales, for instance, fell 8.2 percent last year. Exports showed life in December—up 7.6 percent, the first positive number in five months—because of expectations of trade peace with the U.S.
Second, the expectation of a Phase One pact encouraged companies to keep factories in China. Initially, trade friction between the world’s two largest economies motivated some businesses—such as Google, GoPro, Nintendo, Fitbit, and RH—to move industrial production off Chinese soil. That offshoring is now slowing as business leaders are starting—perhaps too optimistically—to see an end to trade friction.
“The Trump administration’s waffling on tariffs has convinced both suppliers and buyers that it is prudent to stay in China,” Jonathan Bass of PTM Images, an advocate for manufacturing in the U.S., told The Daily Beast on Tuesday. “Nobody now wants to leave and have a competitor take their place at a low-cost Chinese factory.”
It is not entirely clear what the U.S. got in Phase One. Yes, there are promises, but China has made many promises in the past only to violate them later, sometimes with impunity. For instance, it still has not complied with its obligations, contained in its World Trade Organization accession agreement, to open its market to foreign payment processors by 2006.
Moreover, America is not getting much in return for the December tariff concessions. Trump touts China’s future purchases of U.S. farm products, but the country is suffering a severe food crisis and has to make big buys of foreign agriculture, deal or no deal. December food inflation, according to official statistics, was a staggering 17.4 percent year-on-year, which followed a 19.1 percent increase the preceding month. The African swine fever epidemic and armyworm infestation have devastated pork and crop output in the months before the weeks-long Lunar New Year holiday. As a result, an agricultural problem is now a political one. Beijing needs good American chow to keep the Chinese people happily fed.
Furthermore, China’s promises to buy substantial amounts of manufactured goods, although promising-looking at first glance, are probably just a mirage. It’s hard to see how China could honor those commitments while its own manufacturing sector is faltering.
In any event, pursuant to the WTO’s nondiscrimination rule, Beijing may not conclude a side deal of this sort with the United States. China, therefore, must make the same offer to all other 161 WTO member states. That, as a practical matter, is impossible.
There is, however, one thing Trump has accomplished with the Phase One deal. He has, in a real sense, changed the way Americans think about China. For decades, Washington policymakers thought they did not, on balance, have leverage over Beijing. Now, after two years of Trump’s tough tactics, they understand they do indeed hold high cards.
The sin of the Phase One agreement, therefore, is that Trump, possessing great power over China, could have pressed American interests further and gotten a better deal.