The U.S.-China Trade Deal Was Not Even a Modest Win

It’s generous to even call it a deal.

By ZACHARY KARABELL, Politico – 17th January 2020

 So there we have it.

The long-awaited shiny new trade deal with China, inked at a ceremony at the White House on Wednesday in the interstitial space before the Senate impeachment trial dominates the news cycles.

If you detect a note of skepticism already creeping in, it’s because this pseudo-deal deserves not just skepticism but calling out as a dramatic failure of U.S. policy that will have lasting and deleterious effects. The deal simply restores the U.S.-China relationship to where it was pre-President Donald Trump, declares victory in areas that don’t matter as much as they did and has cost the U.S. billions in the meantime.

That it was heralded by the White House and Trump as “momentous” and “remarkable” and “righting the wrongs of the past” is not surprising. That so many in the commentariat gave this Phase 1 deal (so named because it is in theory the first of several phases) the benefit of the doubt is somewhat more so. The A1 article in the Wall Street Journal was measured but said that the deal “contains wins for the U.S.” The New Yorker dubbed the deal “an uneasy truce.” On CNBC, the garrulous Jim Cramer heralded it as a win for Trump and America, saying “tariffs worked.” In general, while few outside the White House saw the agreement as transformative, the reception to it has been amicably positive, if only because it appears to arrest the destructive slide to more and more confrontation, higher tariffs and greater disruption and uncertainty.

Halting the onward march toward an all-out economic Cold War with China is a good thing. But given that the march began with impulse and barely any strategy on the part of the Trump administration and given as well that an even better pseudo-deal, with more agricultural purchases, could have been struck this spring without more escalation of tariffs, the agreement inked this week should be seen as an almost complete failure.

Here’s why. When Trump became president, he immediately latched onto the trade deficit in goods, which showed the United States importing hundreds of billions more goods than it exported to China. Many also assailed China for years of intellectual property theft and forced technology transfers and for restricting market access to U.S. financial companies. Those issues were at the heart of the decision to begin using tariffs to coerce China into changing its behavior.

At best, the Phase I agreement modestly revises the status quo before Trump came into office. The Chinese government has pledged to increase its imports of American goods, including agricultural products, perhaps by as much as $200 billion over the next two years. It has also agreed to more market access and to a streamlined process for American companies to bring actions for intellectual property theft that should be swifter than the multi-year World Trade Organization process now in effect.

Nothing that China has agreed to, however, departs markedly from what it agreed to during the Obama administration. In 2015, President Barack Obama and Premier Xi Jinping announced an end to cyber-intellectual property theft and embarked on a next round of negotiations over market access. By 2016, many experts believed that China was indeed upholding its commitments, more or less, and the two countries were meeting regularly to hash out issues.

That was not at all sufficient for many China hawks, both Republican and Democrat. Trump, with his conviction that trade deficits were a sign of weakness and of the United States being ripped off, helped those voices, which were in danger of being marginalized as the two countries continued to negotiate and increase the amount of reciprocal trade, rise to the fore.

After two years of tariffs and mounting hostility, however, the agreement struck has cost the United States more than $30 billion to subsidize American farmers to compensate for Beijing’s retaliatory refusal to buy American agricultural goods. It has cost American consumers tens of billions in tariffs. It has forced U.S. companies to diversify their supply chains out of China at an additional cost of many billions. Many of those companies were beginning to consider China alternatives before 2017—China is no longer the lowest-cost producer—but having to shift those supply chains under duress added vast unnecessary expenses.

The Phase I agreement barely restores China’s agricultural purchases to where they were before 2017, even as that is presented as a victory. If one of your main customers boycotts you and then agrees to start buying again but buying less, it would be disingenuous to announce that they had promised to buy more. Similarly, China agreed to do what it had already agreed to do in 2015 on intellectual property, except now in 2020, it is spending far more money domestically on its own intellectual property, on 5G telecommunications, artificial intelligence and cybersecurity. Agreeing to honor U.S. intellectual property in 2015 meant some real trade-offs for Chinese companies; in 2020 that’s like agreeing to stop manufacturing biplanes in a jet engine age. Chinese companies, fueled by government priorities, are plunging ahead with their own innovation in order not to be as linked or dependent on the United States going forward. China conceded on intellectual property because it now cares far more about developing its own than stealing from the United States.

And that gets to the core failure: The United States has fundamentally misread the relative strengths of both itself and China. It has acted as if Chinese exports to the United States are the key driver of the Chinese economy and hence tariffs are a potent weapon. As underscored by a recent McKinsey study, in fact, China has been aggressively, purposefully and successfully shifting from an export-driven economy to a consumer-driven one. Much of the gain of exports accrues to the multinational companies that source in China and not to the domestic Chinese economy, and more and more Chinese manufacturing activity is geared toward its own vast internal ecosystem. Tariffs certainly stung, but their greatest impact was not economic but rather as a signal to Beijing that the United States was no longer a reliable economic partner.

Perhaps disrupting the economic relationship between China and the United States has really been the goal, using intellectual property and trade deficits as cudgels. In that sense, this rather anemic trade war (anemic because it has lasted barely two years and because the amount of tariffs was just enough to cause waves but not enough to radically alter the U.S.-China trade balance) may have succeeded.

The conviction that the United States should decouple from China has support across a broad swath of American society, from the Trump White House to Democrats such as Sens. Chuck Schumer and Sherrod Brown. But for all the focus on how much China has taken advantage of the United States, there has been less willingness to acknowledge the ways that China’s economic rise has benefited the United States in terms of lower-cost goods (a partial offset to fewer manufacturing jobs), increased (until now) Chinese investment in the United States, and American companies and farmers selling into the rapidly growing China market.

 Yet, few—not even the president—admit or say publicly that the goal is to fracture the economic relationship with China permanently, and succeeding in hobbling the U.S.-China economic entwinement can only be called a success if it demonstrably strengthens the United States going forward. Evidence for that is lacking. In the absence of any coherent industrial policy emanating from Washington, those global supply chains that now bypass China and instead run through Vietnam do not reinvigorate American businesses. And with Chinese now buying less real estate and making fewer investments in the United States, with Chinese student enrollment in U.S. universities tailing off, and with Chinese tourism and purchases of U.S. services in decline, the domestic American economy is tens of billions of dollars poorer with little to show for it.

The only clear winner from the past two years is China. Beijing has taken the measure of the United States and concluded that less economic engagement with America is in its self-interest. The country may have been headed in that direction regardless of the tariffs, but U.S. policy has accelerated that move. The Chinese in turn have diversified their investments globally, no longer as dependent on the hundreds of billions in U.S. Treasuries, and they have redoubled their efforts to build a domestic economy and military that are immune from the coercive whims of the United States. And while that too may have happened no matter what Washington did, the United States could have continued to benefit from China’s economic rise and also constrained Beijing by a tighter relationship rather than by an adversarial one. The trade war and the paper-thin truce codify a new order that will see ever less American leverage going forward. By focusing on the abuses of the past, the United States has failed to meet the challenges of China going forward. It has declared victory in a war that it started over issues that matter less and less. It is not just a hollow victory—it’s no victory.