That sound that you may have heard on Wednesday morning was that of a heavy truck spinning its wheels, as President Trump signed an agreement with China that imposes a ceasefire in a trade war that has practically achieved nothing for the Americans, except the imposition of a huge economy costs for American consumers, farmers and manufacturers.
At the signing ceremony, Trump called the agreement “transformative,” which is surely an exaggeration. The agreement establishes most of the tariffs that Trump has imposed on Chinese products since 2018, which means that the majority of the retaliation tariffs that China has imposed also remain.
Despite Trump’s mantra that tariffs are paid by the Chinese, trade experts are virtually unanimous in concluding that Americans have paid them in full. As a result, according to a recent Federal Reserve investigation, that meant higher prices for American consumers, lower manufacturing growth and the crater of agricultural exports.
This is a managed trade agreement, not a free trade agreement.
Raj Bhala, University of Kansas
High tariffs are “the new normal in the problematic economic relationship between the United States and China,” Chad P. Bown of the Peterson Institute for International Economics observed, last month after the essential elements of the agreement were first announced.
Even after the agreement, the average US tariff. UU. On China’s imports it will continue to be 19.3%, a modest reduction of the level prior to the agreement of 21% and more than six times its level of 3% before Trump launched the tariff war.
Through the agreement, China pledges to earn $ 200 billion over the next two years in new purchases of agricultural and manufactured goods, services and crude oil and other energy. But there are widespread doubts that China can really absorb imports at such a scale. That points to the question of how their commitments can be monitored and enforced.
The agreement incorporates a bilateral enforcement mechanism, but Trump has shown deep hostility towards other international trade enforcement agencies, in particular the World Trade Organization, which could have been hired to monitor China’s compliance.
If China fully complies with all the terms of the agreement, that would greatly contribute to meeting one of Trump’s explicit objectives in trade policy: reduce China’s huge trade surplus with the United States, which reached a record of $ 323.3 1 billion in 2018. The surplus fell last year to $ 295.8 billion in large part due to rates, but that was even higher than in any year other than 2018.
But the agreement does little to affect the structural imbalance in trade between the United States and China, consanguineous factors that encourage Americans to buy more from China than US manufacturers and producers sell there. “This is a managed trade agreement, not a free trade agreement,” says Raj Bhala, an international trade expert at the University of Kansas Law School.
That raises questions about how trade between the US will look. UU. And China after the specific commitments expire in two years, especially since the agreement signed on Wednesday does not cover some of the non-tariff trade barriers that keep China’s markets largely closed to US manufacturers and apparently fueled the war. Trump’s commercial first. These include restrictions on public procurement and subsidies to state-owned companies.
“Not addressing China’s subsidies is a giant hole in the phase one agreement,” Bown tweeted after Wednesday’s signing ceremony. “There’s no way to avoid it”.
Although the agreement hints at progress on issues such as the theft of technology in China, it does not address what Bhala calls “intellectual property issues of the 21st century,” such as privacy protections.
Finally, the agreement does not touch China’s great ambitions as an economic actor, such as those embodied in its 10-year “Made in China 2025” plan presented in 2015. The plan requires that China become the dominant global force in automobiles electrical, aircraft manufacturing, biotechnology, advanced telecommunications, robotics and artificial intelligence.
The administration figures have argued that the costs of the commercial war are short term and that over time it will generate gains in employment and national security. Economists have doubts, due to their historical sense that trade wars generally have no winners.
“While the long-term effects are still to be seen,” observed researchers led by Mary Amiti of the Federal Reserve Bank of New York, in the first year of tariffs, “the United States experienced substantial increases in intermediate product prices. and finished., … reductions in the availability of imported varieties, and complete transfer of tariffs to internal prices of imported goods “.
To briefly recap the trade war, Trump imposed tariffs on some $ 360 billion in Chinese products from mid-2018. Most of those tariffs will remain in effect following the agreement, although tariffs on approximately $ 112 billion in goods of consumption such as clothing and sports equipment will be reduced to 7.5% from 15%, and threaten with 25% tariffs on an additional $ 160 billion. – including cell phones and computers – will remain on hold.
And the 25% tariffs remain in force in the rest of the imports, including raw materials and components used by US manufacturers to manufacture products in the country. Trump says the remaining tariffs will not be reconsidered until after the election.
Tariffs not only reached US consumers through higher national prices, but also cost American companies the time and effort to find new suppliers outside of China. US exports to China fell due to retaliatory duties imposed by Beijing to more than $ 110 billion in goods such as steel, aluminum and agricultural products. The agricultural economy was deeply damaged: for example, purchases of soybeans by China, formerly the main export partner of US soybean producers, fell to zero in November 2018.
The costs of the commercial war for other sectors have also been significant. The Trump administration has announced approximately $ 28 billion in emergency aid to farmers affected by the trade war. U.S. taxpayers will pay the bill for those payments, in addition to the higher prices they are paying for imported national goods and affected by tariffs. (Most of the agricultural aid, as we have reported, goes to farmers and wealthy agribusinesses).
It is estimated that so far $ 41 billion of China’s tariffs have been raised. According to Amiti, “these tariff revenues are a pure transfer of national consumers to the government.” That would amount to approximately two tenths of 1% of gross domestic product, characterized by Amiti as a “deadweight loss” for the economy.
Clearly, there are good economic reasons to reconsider the trade war. Those do not seem to have entered into the administration’s calculations, which seem to be much more focused on politics. Both sides have immense incentives to quell the rhetoric of war and keep their weapons sheathed, for the moment. Trump faces a political trial followed by a presidential election, amid signs that economic growth is slowing. The Chinese regime faces civil unrest and a slowdown in economic growth.
However, once those conditions pass, so will the conflicts. Like Claire Reade, a former US compliance officer. In the US, he told my colleague Don Lee, “the fundamental tensions between the US and China will not diminish, even if the administration has made incremental progress and has met certain political objectives that could calm the situation.” short term relationship “.
The biggest question raised by the Phase 1 agreement is whether China takes its import commitments seriously. Many experts call them “ambitious,” which is a polite way of saying “unlikely.”
Consider the commitment of more than $ 52 billion in energy imports for two years. China imported about $ 8 billion a year in crude oil, liquefied natural gas and other energy products from the US. UU. In 2017 and 2018, but trade fell sharply last year during the trade war.
The agreement suggests that Chinese imports would triple, which would be a huge increase, given that the country has other sources of importation and is also trying to develop national exploration. In any case, US crude is different from the raw material that Chinese refineries are designed to use.
Ironically, even though the administration is promoting the agreement as one that “corrects the mistakes of the past,” as Trump said at the signing ceremony, it could well unite the two countries in an awkward interdependent relationship. US manufacturers and producers may become dependent on the import target written in the agreement, which increases their risks if they increase to meet a Chinese demand that could disappear after the agreement expires.
The United States remains the largest single export market in China, and China is the largest supplier of imported goods from the United States. Trump’s trade war has not yet changed that, nor does it appear to have altered the trajectory of the commercial relationship for the future. It just made it more expensive.