Is the “Phase 1” trade deal with China a bad deal?

January 20, 2020

https://www.reuters.com/article/us-usa-trade-china-details-factbox/whats-in-the-u-s-china-phase-1-trade-deal-idUSKBN1ZE2IF

The above-linked Reuters article provides a breakdown in basic terms of what’s included in the “Phase 1” trade deal with China.  To make it easier to understand – and in preparation for tracking progress – I’ve created this spreadsheet, which shows what China has agreed to in terms of boosting its imports from the U.S.  Phase 1 China Trade Deal.

In addition, China agreed to:

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

…  follow through on previous pledges to eliminate any pressure for foreign companies to transfer technology to Chinese firms

… refrain from directly supporting outbound investment aimed at acquiring foreign technology

… refrain from competitive currency devaluations

China’s retaliatory Dec. 15 tariffs, including a 25% tariff on U.S.-made autos, have been suspended.

So what did the U.S. give up in return?

… will cut by half the tariff rate it imposed on Sept 1. on a $120 billion list of Chinese goods, to 7.5%.

Tariffs that were scheduled to go into effect on Dec. 15 on nearly $160 billion worth of Chinese goods, including cellphones, laptop computers, toys and clothing, are suspended indefinitely.

That’s the deal in a nutshell.  On the surface, it sounds like a good deal, boosting exports by $200 billion per year.  But don’t be fooled.  This deal rolls back some existing tariffs and suspends new tariffs – tariffs that were making rapid progress toward restoring a balance of trade with China – in exchange for nothing more than promises, and China has a long history of breaking its trade promises.  China got exactly what it wanted – time – more time to continue business as usual.

With this deal, the U.S. is once again trying to export its way out of its massive trade deficit.  It’s similar to the vow that Obama made in January of 2010 to double export within five years.  It didn’t happen.  Not even close.  It’s impossible to export your way out of a trade deficit with nations whose gross over-crowding makes them utterly dependent on manufacturing for export to sustain their bloated labor forces.  And that’s China, among others.

Aside from their promise to boost imports, that promise about protecting intellectual property has been made many times before.  It’s untrackable and meaningless.  And currency manipulation?  The data proves that trade deficits have nothing to do with currency valuation.

The only hope is that the Trump administration will be more diligent than previous administrations in holding China’s feet to the fire, returning to the use of tariffs when China fails to meet its commitments.  China’s betting they won’t, and that future administrations will roll over like previous administrations.

I’ll begin tracking China’s progress on meeting its import commitments (or lack thereof) beginning with the January trade data, which isn’t released until March.


Case Study on Shifting Production Out of China

January 15, 2020

https://www.fidelity.com/news/article/top-news/202001140706RTRSNEWSCOMBINED_KBN1ZD1FV-OUSBS_1

The above-linked article provides an interesting example of a small company trying to move production out of China to avoid the tariffs.  This is a low volume, niche bicycle company.  Some of the points made in the article merit comment:

After months of research and several trips, a small Taiwanese factory agreed to make his bikes but he had to triple orders and pay 30% of the cost of goods up front, unlike in China where he paid upon delivery.

The new terms locked up as much as $1 million of working capital until the bikes were shipped and required a new credit line. After a year of toil, State Bicycle managed to shift production of only two of its five models which are sold in the United States.

Let’s step back and take a look at this situation.  Bear in mind, we’re talking about bicycles here.  Bicycles are not terribly sophisticated nor difficult to make.  The biggest components – the frame and the handlebars – are nothing more than bent and welded tubing.  Tools to bend and weld tubing are readily available at low cost right here in the U.S.  Beyond that, we’re talking about rims, hubs, spokes, sprockets, bearings, axles, chain, a seat, tires and little else.  The million dollars of working capital and the money spent on those trips to Taiwan could have easily purchased the tooling to make those parts right here.  How much sense did it make to spend months of globe-trotting like a chicken with your head cut off, and all that money?

In a move to help bicycle companies, the Trump administration has been granting tariff exclusions to some of their imports since September. The relief, however, is only for a year and is meant to give them more time to move production – ideally to the United States.

Therein lies a big part of the problem.  Companies believe the tariffs won’t hold and can just wait them out.  Eat the tariffs for a year or so and avoid the cost of moving production.  Trump’s use of tariffs has been far too timid and too narrowly focused on China.  Why only focus on China when, in per capita terms, other countries’ trade surpluses with the U.S. are much larger?

Don DiCostanzo, chief executive officer of Pedego Electric Bikes https://www.pedegoelectricbikes.com in California, said higher labor costs and the absence of a viable supply base have made it “virtually impossible” to assemble bikes in the United States.

Seriously?!?!?  Again, we’re talking about bicycles here.  We build cars, trucks and airplanes in the U.S.  Are we to believe that the simple parts I’ve listed above can’t be sourced in the U.S.?  Most any half-competent machine shop, of which there are thousands in the U.S., could quickly produce those parts.  With a little effort, Pedego could set up shop and make them themselves.  Yes, labor costs would be a little higher, but not that much, and they’d be offset by far lower shipping costs.

In the 1970s, the United States assembled more than 15 million bicycles a year. Now it makes fewer than 500,000, according to industry data presented to the United States Trade Representative (USTR) in 2018. By contrast, China made about 95% of the 17 million bikes sold in 2018, U.S. Census data showed.

OK, wait a minute.  This paragraph just refuted the whole premise of this article – that there’s no supplier base and labor costs are too high to build bicycles in the U.S.  Now we learn that somebody is actually building a half million of them in the U.S.  Obviously there actually are sources available for the parts and bikes can be built and sold here at a profit.

Pedego Electric Bikes said it didn’t have any difficulty finding a factory in Vietnam because it was among the first companies to move there. But it faced other challenges.

It had to bring in workers from China to train local staff. Batteries had to be sourced from Japan or Korea and tires from Malaysia. “We had to set up the supply chain,” DiCostanzo said. “That was perhaps the most frustrating part.”

They had to bring workers in from China to train the Vietnamese?  Why didn’t Pedego train them themselves?  It’s likely because Pedego laid off everyone in the company who actually knew how to manufacture bicycles when they moved to China in the first place.  Personally, I’d be ashamed to market bicycles that I didn’t even know how to make.  Nor would I want to buy one from a company who knew so little about their own product.

“It is very difficult to get out of China,” said Alex Logemann at U.S. industry association PeopleForBikes https://peopleforbikes.org.

Baloney.  They had no problem getting into China when it was an undeveloped backwater of rice farmers and little else.  Getting setting up somewhere else, especially in the U.S., should be far easier.

By the way, I own two bicycles myself – both of them Schwinn.  The oldest, a Schwinn Continental that I bought in 1971, is a beautiful bike that was built in the U.S.  While somewhat crude by today’s standards, it was one of the finest bikes you could buy back then and it’s my favorite.  The newer one I received as a gift and it’s a nice bike, but it saddened me when I learned that it was built overseas.

When I first read this article, I was rooting for these companies to figure out a way to set up shop in the U.S.  I think I’ve changed my mind.  Frankly, I hope they all fail, making it that much easier for those companies who are currently building those half million American-made bikes to flourish and grow.  Nearly every bike sold in the U.S. was American-made at one time.  It could be that way again.

 


November Trade Report Best in Two Years

January 11, 2020

Click to access trad1119.pdf

… or three years, depending on how you look at it.  In terms of the overall trade deficit, it was the lowest since October of 2016.  More importantly, the deficit in manufactured goods, at $63.2 billion, was the lowest since September of 2017 – good news, but that’s still a horrible deficit.  (A link to November’s report is attached above.)  Check out this chart of the balance of trade in manufactured goods:  Manf’d Goods Balance of Trade.

The drop in the deficit is due entirely to a decline in imports.  (Exports remain flat.)  Most notably, the deficit with China shrank to $26.4 billion, the lowest reading since March, and down from $37.9 billion during the same month in 2018 – a 30% drop.  This is solid evidence that the tariffs on China are having the desired effect.

In related news, this Reuters article reports that tariffs – primarily the tariffs on China – have cost U.S. companies $46 billion.  That’s actually good news.  It means that they’re “eating” the cost of the tariffs and not passing it on to consumers.  It also means that U.S. companies are evaluating what to do about it.  Should they keep their manufacturing in China in the hopes of waiting out the “trade war” for the tariffs to come down?  Or do they begin implementing plans to shift manufacturing to other locations?  If they choose the latter, do they move operations to some other country and risk facing tariffs there too?  Or do they bite the bullet and move operations back to the U.S.?  If the U.S. is serious about cutting its trade deficit, it has to remain committed to tariffs and implementing them on a much broader scale.  If they do, moving manufacturing back to the U.S.  is the only logical choice for U.S. companies.  Adapt or just keep “eating” those billions of dollars.


Another Phony Story about “Trade War” Woes for Farmers

January 8, 2020

https://www.reuters.com/article/us-usa-trade-china-agriculture-insight/u-s-farmers-see-another-bleak-year-despite-phase-1-trade-deal-idUSKBN1Z20CK

This above-linked article about suffering on American farms caused by Trump’s “trade war” with China was posted on Reuters last week.  I’ve been sitting on it, waiting for the latest trade data (which was posted yesterday by the Commerce Department) to refute the claims in the article.  This seems to have become a favorite tactic of the globalist media – trying to get Americans – especially farmers, a key component of Trump’s base of support – up in arms over the tariffs he imposed on China.  The article leads you to believe that American farmers had a horrible year, thanks to China retaliating against the tariffs by stopping their purchases of American agriculture products – most notably soy beans.  Here’s some samplings from the article:

… U.S. farmers are stuck with fields full of weather-damaged corn – a crop they planted after the U.S.-China trade war killed their soybean market.

As the U.S. farm economy reels from the worst harvest in decades after nearly two years of the trade war, U.S. grain growers are struggling to decide what crops might keep them in business.

China has … deepened ties with rival exporters such as Brazil and Argentina. Brazilian soy cultivation is expanding after record exports to China in the past year and China is investing in South American ports.

The article makes no mention of the fact that European nations have now turned toward the U.S. for their supplies, having been displaced from the South American market.

Many U.S. farmers have tried shifting crops to dodge the economic fallout from losing such a crucial export market. They planted 76.5 million acres of soybeans in 2019, 14.3% fewer than the previous year, according to the latest U.S. Department of Agriculture data. U.S. plantings of sorghum – used in livestock feed and the fiery Chinese liquor baijiu – dipped about 7.5% in 2019, to 5.3 million acres. Plantings of cotton have dropped, too, as China pulled back on purchases.

Come on, Reuters, isn’t the real reason that fewer acres were planted this year the fact that vast swathes of farmland were still under water in the early summer as a result of spring flooding?  I guess they want you to forget that factor.

“The agricultural system is completely broken” because of the trade war, severe weather and mounting farm debt, Hora (an Iowa farmer) said. “We have to farm smarter.”

The fact is that, in terms of exports, American farmers actually had a pretty good year.  According to the trade report released yesterday (see page 20), exports of “food, feeds and beverages” were actually up slightly year-to-date through November, rising to $123.998 billion in 2019 from $123.247 billion in 2018.  Soybean exports are up dramatically to $21.687 billion from $17.583 billion in 2018.  Other categories are up or down sightly with the exception of corn, which is down by $4.638 billion compared to last year.  (The Reuters article did note that severe weather had damaged a lot of the corn crop.)

Don’t get me wrong.  It’s a struggle to survive for farmers, even in the best of times, especially for small family farms that are being driven out of business primarily by big corporate farms.  But in spite of poor weather conditions, American farmers have actually had a pretty good year in terms of exports.  Yes, exports to China are down, but those have been offset by exports to other countries that had been sourcing from South America.  The people of the world still need to eat, and so do livestock, regardless of what’s happening with trade policy.

Pay no attention to these fake stories about the “trade war” hurting farmers.  The globalists are desperate to put a bad spin on tariff policy, especially as their other dire warnings about economic doom have been proven false.  The November trade report has even more good news about the impact of the tariffs.  I’ll post about that next.