Perspective on US-China Trade War Resolution, Phase One

Last Thursday, the United States and China announced that the two countries had reached agreement on a “phase one” trade deal. While details have not been disclosed, some of the key provisions are that China has agreed to buy $50 billion worth of agricultural, energy and other goods in 2020, and the United States has agreed to cut the tariff rate from 15 percent to 7.5 percent on approximately $120 billion of goods from China affected on September 1 and has also canceled the new tariffs on $156 billion of goods that were set to go into effect on Sunday, December 15. Tariffs of 25 percent on $250 billion of Chinese products, including machinery, electronics and furniture, will remain in effect.

Reportedly, the phase one deal, which is expected to be signed in January, also includes measures to improve intellectual property protection, open the Chinese financial services market and prevent currency manipulation. Phase one is expected to lead to a phase two deal that will address issues such as forced-technology transfer, subsidies, and the behavior of Chinese state-owned firms.

Critics from both sides of the aisle were quick to criticize the agreement. Senator Marco Rubio, Republican from Florida, tweeted that the “White House should consider the risk that a near-term deal with China would give away the tariff leverage needed for a broader agreement on the issues that matter the most such as subsidies to domestic firms, forced tech transfers and blocking U.S. firms access to key sectors.” Senator Chuck Schumer from New York penned a letter from Democrats saying that “failure to secure commitments from the Chinese government to enact substantive, enforceable, and permanent structural reform will jeopardize American jobs and long-term economic prosperity.”

It is ironic that politicians, who have been in government and positions of influence for decades, but have never taken any steps to confront China, now feel free to criticize the efforts of the first administration to do so. After all, trade issues with China and its practices with respect to intellectual property rights are not new.

When China joined the World Trade Organization (WTO) in 2001, it joined as a “developing country.” Today, China is anything but. The country is the world’s second largest economy and the second largest recipient of foreign direct investment, just after the United States. In 2019, the Fortune 500 list of the largest companies in the world included 119 Chinese companies, almost as many as the United States. In industry after industry, China now leads the world. China’s auto market, for example, is almost twice the size of that in the United States.

In its annual report to congress, the United States Trade Representative (USTR) identifies and explains numerous policies and practices pursued by China that disadvantage or harm U.S. companies and workers. In its most recent report, the USTR stated that: “Despite persistent efforts by the United States to address these issues, many of them reflect longstanding U.S. concerns, dating back a decade or more. As we catalogued in last year’s report, a consistent pattern exists where the United States has raised a particular concern, China has specifically promised to address that concern – and China’s promise has not been fulfilled.” The USTR further concludes that “China’s market distorting policies and practices harm and disadvantage its fellow WTO members, even as China reaps enormous benefits from its WTO membership.”

In the spring of 2000, when congress was set to vote on his proposal to allow China into the WTO, President Clinton, said in a speech to the Johns Hopkins’s School of Advanced International Studies that: “By joining the WTO, China is not simply agreeing to import more of our products, it is agreeing to import one of democracy’s most cherished values, economic freedom….When individuals have the power not just to dream, but to realize their dreams, they will demand a greater say.”

In the years following, as it became increasingly clear that President Clinton’s vison was not being realized, critics like Senators Rubio and Schumer have been silent. Meanwhile, Republican and Democratic administrations alike have stood by and watched, but have done nothing to correct China’s abuses — until the Trump Administration came along that is. In Trump’s view, allowing China to enter the WTO in 2001 was a historic mistake that cost the U.S. millions of jobs and trillions of dollars in accumulated trade deficits. In addition to bypassing WTO trade rules and imposing tariffs on China, President Trump is threatening to withdraw altogether from the WTO.

The reality is that 20 years of bad practice cannot be corrected in one go. It will take phase one, phase two and a great deal of follow-up in the years afterwards to address the issues at hand. Meanwhile, it makes sense to take any immediate gains that can be had off the table. Through October, China has purchased $87.6 billion of products from the United States, approximately $9.0 billion per month. Assuming that rate holds, China will buy just over $105 billion of U.S. made goods this year. Against that backdrop, $50 billion of purchases in agriculture and energy in 2020 is very significant and will provide a significant boost to those two sectors of the U.S. economy.

Unlike the politicians, the stock market understands the wisdom of breaking a large complicated negotiation into more manageable, smaller stages, as well as the impact that phase one will have on the U.S. economy. Since October 11, when President Trump first announced the possibility of a smaller, initial deal, the Dow Jones industrial Average has increased by an additional five percent from already record levels. While favorable jobs numbers and Fed actions have played a role in the stock market run up, sentiment towards the trade talks between the United States and China has been one of the biggest stock market drivers for the past two years.

Critics of President Trump’s negotiating strategy with respect to China decry his use of tariffs, and suggest that, rather than going it alone, the United States should have taken a more multilateral approach. Anyone who has been involved in negotiations knows that it is impossible to have a good result unless one has leverage. This is especially true with China, a country that has a reputation for being a tough negotiator. In that context, imposing tariffs is merely a way for the United States to gain a degree of leverage. As for the multilateral approach, the U.S. experience with WTO demonstrates the shortcomings of enlisting the support of global bodies whose members often have different agendas from those of the United States.

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