“Phase 1” Trade Deal with China a Major Disappointment

https://www.reuters.com/article/us-usa-trade-china-details-factbox/whats-in-the-u-s-china-phase-one-trade-deal-idUSKBN1YH2IL

On Friday, the Trump administration announced that it had reached a “Phase 1” agreement with China that cancels a new round of tariffs that were to have taken effect Sunday, and rolls back some other tariffs, in exchange for … well, nothing really, except some empty promises by the Chinese.  (The above-linked article details what’s included in the deal.)  This is a huge disappointment.  It sends a message to manufacturers that waiting out the tariffs was the right move, as opposed to repatriating their manufacturing operations, and it’s now “business as usual” with China.

Trump clearly got suckered on this one.  China has a long history of reneging on their promises and this will be no different.  Actually, it’s worse than that.  Even if most of these promises are kept, it’ll have no impact on America’s economy.  Why?  Let’s go through the items in the deal as listed in the above-linked article, and see why.

China canceled its retaliatory tariffs due to take effect that same day, including a 25% tariff on U.S.-made autos.

China scarcely imports any U.S. autos anyway, and that’s not going to change regardless of whether or not they’ve placed tariffs on them.  China is awash in auto manufacturing capacity and isn’t about to put their auto workers out of business in order to import cars from the U.S.  So this concession is of zero value to the U.S.

U.S. officials say China agreed to increase purchases of American products and services by at least $200 billion over the next two years, with an expectation that the higher purchases will continue after that period.

Note that it’s “U.S. officials” making this claim.  China hasn’t actually agreed to this and they would never do it.  They have no capacity to absorb such imports.  Mark my word, U.S. exports will scarcely rise at all in the next two years.

China has committed to increase purchases of U.S. agriculture products by $32 billion over two years. That would average an annual total of about $40 billion, compared to a baseline of $24 billion in 2017 before the trade war started. … China agreed to make its best efforts to increase its purchases by another $5 billion annually to get close $50 billion.

They might actually increase their imports of U.S. agriculture products some, but so what?  If they do, Europe will return to buying theirs from South America (where the Chinese have been sourcing theirs), so the increase in Chinese imports will be offset by a loss of other exports.  The impact on American farmers will be zilch.  Regarding that last statement, “China agreed to make its best efforts …”  That’s their way of saying they won’t.

China has committed to reduce non-tariff barriers to agricultural products such as poultry, seafood and feed additives as well as approval of biotechnology products.

For the reasons I just stated, this commitment is meaningless.  Shifting American exports from other markets to the Chinese market accomplishes nothing.

The deal includes stronger Chinese legal protections for patents, trademarks, copyrights, including improved criminal and civil procedures to combat online infringement, pirated and counterfeit goods.

The deal contains commitments by China to follow through on previous pledges to eliminate any pressure for foreign companies to transfer technology to Chinese firms as a condition of market access, licensing or administrative approvals and to eliminate any government advantages for such transfers.

China also agreed to refrain from directly supporting outbound investment aimed at acquiring foreign technology to meet its industrial plans — transactions already restricted by stronger U.S. security reviews.

They’ve agreed to these same things many times in the past.  When it doesn’t happen and an American company complains, China will brush it off as an isolated incident that they’re addressing.

The currency agreement contains pledges by China to refrain from competitive currency devaluations and to not target its exchange rate for a trade advantage — language that China has accepted for years as part of its commitments to the Group of 20 major economies.

So here’s another agreement that the Reuters article correctly identifies as nothing new.  Besides, as I’ve explained many times in other posts, currency values have absolutely nothing to do with trade imbalances.

Under dispute resolution is an arrangement allowing parties to resolve differences over how the deal is implemented through bilateral consultations, starting at the working level and escalating to top-level officials. If these consultations do not resolve disputes, there is a process for imposing tariffs or other penalties.

I’m sure the Chinese love this one.  “Dispute resolution” is something they’ve used for decades to forestall any meaningful retaliation when they violate or fail to live up to their agreements.

U.S. officials said the deal includes improved access to China’s financial services market for U.S. companies, including in banking, insurance, securities and credit rating services.

When China was given “most favored nation” trading status by Clinton in the late ’90s, it was clear that the manufacturing factor sector of our economy was about to be destroyed.  The free trade globalists promised that America would be transformed into a services powerhouse economy.  It never happened.  Such services are nothing more than computer transactions and create few jobs.  The inclusion of a promise of more access to the Chinese economy would mean virtually nothing to the American economy, even if it did happen, which it likely will not.

All of the emphasis in this trade deal is on exports to China, with no emphasis on the reduction of imports.  It’s as though Trump has taken a page from Obama’s playbook when Obama promised in 2010 to re-balance trade by doubling exports in five years.  How did that work out?  Five years later, exports of manufactured goods were up by only 9% – not even keeping pace with inflation, which means that exports actually fell.  By the time Obama left office, exports were even lower.  Obama’s failure to do anything meaningful to re-balance trade during his two-term tenure was a major factor in Trump’s victory over Hillary Clinton.

So that’s it.  Trump’s trade agenda has been not just stalled, but rolled back to some degree, for nothing more than promises that won’t be kept.  The emphasis on boosting farm exports is a blatant pandering to Trump’s electoral base.  It seems as though, with this trade deal, Trump believes that the U.S. will be better off if it returns to being an agrarian society.  If we were a country of 100 million people, like in the late 19th century, that might be true.  With a population of 330 million people, we can’t have a viable economy without an industrial base.  The de-industrialization of America has got to stop.  When dealing with a badly overpopulated nation like China, it’s impossible to export your way out of a trade deficit.  They have no capacity to boost their imports because their per capita consumption, emaciated by overcrowding, prohibits them from even absorbing their own domestic industrial capacity.

So what would a better deal look like?  No deal at all.  No overpopulated nation like China will ever deal away the manufacturing for export that is so vital to their economy, and wouldn’t comply with any deal that threatened it.  The only way to restore a balance of trade with China is to levy heavy tariffs to make their products noncompetitive with American-made goods.  If it ultimately leads to a cessation of trade with China altogether, the American economy would enjoy a $450 billion/year boost.  The American economy would actually be far better off if China fell off the map.

The Trump administration needs to stop seeing tariffs as negotiating leverage, and start seeing them as the only way to maintain a balance of trade.  Trump is frittering away his opportunity to truly “Make America Great Again,” something he can’t legitimately claim has happened until America is restored to the industrial powerhouse that it once was.

 

 

 

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