Why Blowing Up the U.S.-China Trade Deal Would be Bad for America

If President Donald Trump really wants to turn China-United States relations into a new Cold War, this week’s midyear review of the “Phase One” trade agreement provides him an opportunity.

The simple reality is that China is dramatically behind on its core commitment to buy an additional $200 billion in American goods by the end of 2021, as agreed upon in the January 15, 2020 deal. Always a stretch, it is now even more challenged by the global pandemic recession. According to Chad Brown from the Peterson Institute for International Economics, China’s purchases of all products covered by Phase One were $33.3 billion as of June 30—less than half of its year-to-date targets, and less than one-sixth the 2021 goal.

This coming weekend, U.S. Trade Representative Robert Lighthizer will Zoom-meet his Chinese counterpart Vice Premier Liu He to talk about Phase One progress. The China hawks in the White House must be pondering whether to blow up the deal now, rather than risk being branded as a “failure” by Joe Biden in the fall.

Mired in the deepest recession since the Great Depression, with trenchant criticism of his handling of the pandemic and dire poll numbers, Trump’s team is no doubt looking for a Hail Mary to revive his re-election prospects. Anti-China is one of his go-to moves. Abandoning the trade deal, presumably accompanied by tariff hikes against Chinese products, would be the latest, and most extreme, effort.

The president should resist this political logic, for four reasons:

1.      As Trump likes to point out, China is in the midst of its worst economic downturn since its opening to the global economy more than 40 years ago. Demand, for domestic products as well as imports, is way down. This simply was not in the cards when the Phase One deal was inked seven months ago. Rather than walk away from the deal, China and the U.S. should recalibrate it for the pandemic world.

2.      Trump’s core economic grievance is that while America has opened its market to Chinese products, China has not reciprocated. The result has been a gaping bilateral trade deficit that rose to nearly $420B in 2018. But an amazing thing has happened amid the trade war and now the pandemic—the 20-year trend of rising trade deficits has been reversed. In 2019, the trade deficit dropped by $74B. In the first six months of 2020, it has dropped by another $35B. The president can use this as his big China win—“I have already cut the deficit by more than $100B.”

3.      Flare-ups in U.S.-China relations always make the market jittery. Blowing up the Phase One deal would have far worse consequences. The surprising buoyancy of the American stock market during the pandemic recession is one of the few positive talking points left for Trump. It would seem foolhardy to risk this 18 months before the formal “due date” for China’s Phase One commitments.

4.      Major American companies as diverse as Apple and General Motors, Qualcomm and Starbucks all depend heavily on China either as a market or as the vital cog in their global supply chains. Killing the trade deal would result in significant markdowns of their stock, hurting their American shareholders.

The Better Move

A much better move for Trump would be to convince the Chinese to make even more trade guarantees, with more commitments to buy American—agriculture and Boeing planes the most plausible examples. China would likely agree because the last thing it needs is even higher levels of tension in its relationship with the United States

Moreover, while China was the first country into a coronavirus-led downturn, its economy is now showing real signs of recovery. Trump could use this as a reason for optimism that China will still meet its Phase One obligations by the end of 2021. And if Lighthizer comes back with more guarantees of future Chinese purchases, Trump could argue that even in the pandemic, his tough negotiating tactics are generating even more wins for America.

U.S.-China relations have deteriorated badly in the past six months, from China’s heavy-handed new national security law for Hong Kong to the U.S.’s declaration that Huawei and now TikTok are threats to American national security. Trump clearly believes getting ever tougher with China is in his electoral interests. He must be tempted to torpedo the current trade deal and go back to last year’s trade war. But giving China another chance is the right thing to do, not only for the American economy, but maybe for the president’s re-election prospects too.