Phase One of the China Trade Agreement in Context

President Donald Trump greets Chinese Vice Premier Liu He after signing phase one of the U.S.-China trade agreement in the East Room of the White House, January 15, 2020. (Kevin Lamarque/Reuters)

Trump’s obsession with the trade deficit is front and center.

In confronting China, policymakers tend to prioritize one of two broad categories: economics or national security. The economic priorities branch out into two further categories: (1) reducing distortions to the global economy caused by Chinese mercantilism or (2) reducing the bilateral trade deficit. The United States trade representative, Robert Lighthizer, falls into the former category, the president into the latter.

To be sure, Chinese subsidies and intellectual-property theft feed into the trade deficit insofar as they enable Chinese firms to compete globally, but curbing China’s industrial policy would hardly guarantee a reduction in the trade deficit. Even if China liberalizes, the U.S. will remain a consumption-driven, high-wage economy unlikely to sell more goods than it buys. So while those in the trade-deficit camp may prefer structural changes to “China, Inc.,” their aims require more from a trade agreement than liberalization. In fact, as Trump’s express affinity for tariffs shows, a protectionist regime is more likely than a free-trade regime to close the gap between imports and exports, albeit at great economic cost.

Other policymakers, those who fall into the national-security category, argue that China’s civil–military–corporate fusion renders its economic practices a geopolitical concern. Technology transfer, foreign investment, and corporate subsidies all play a role in China’s “hundred-year marathon” to overtake the U.S. as the global hegemon. On this view, the economic loss that accrues from trade and investment restrictions is justified by the need to defend the liberal world order and promote human rights. Many in this category, such as Senator Marco Rubio (R., Fla.) and the Hudson Institute’s Michael Pillsbury, support a wholesale decoupling from China, judging that tariffs and export controls will not persuade a steadfast Chinese Communist Party (CCP) to upend its development model. Unlike economic hawks, national-security hawks vary in degree but not in kind. While they may disagree as to the severity of the Chinese threat, they share the goal of sacrificing some economic growth to counteract Chinese power.

With a motley crew of policy advisers vying for influence in the White House — Lighthizer, Peter Navarro, Steve Mnuchin, Wilbur Ross — it has never been entirely clear which framework would dictate negotiations with China. The resounding answer in phase one is that Trump got his way: Reducing the trade deficit has taken precedence over all else.

Of the agreement’s 96 pages, 23 are devoted to agricultural exports, with only three on technology transfer and four on financial services. While it includes vague language on IP provisions and an uncertain enforcement mechanism, the deal mandates precise levels of purchases for oilseeds, cereals, and seafood (which, a footnote tells us, includes lobster). In negotiations aimed at least in part at curtailing Chinese mercantilism, American representatives requested that China direct bilateral trade from on high. If the administration attempts to address industrial policy in subsequent rounds, they will in effect be asking China to violate the terms of this agreement.

Perhaps more alarming, China can now use American imports as a shield to defend its planned economy. If the administration penalizes China for violating the terms of the deal, it risks reducing exports by over $100 billion — a hard pillow to swallow. The president will likely accept continued malfeasance (on technology theft, for example), in order to protect the trade balance. In effect, China will be paying the U.S. a total of $200 billion over two years in return for tacit tolerance of its coercive business practices. The ink was still dry on the agreement when the Chinese started brandishing their new weapon: The editor of China’s state-owned Global Times said on Thursday, “There cannot be a new outburst of the trade war, otherwise U.S. farmers will be implicated again.” The message is clear: If the White House attempts to enforce the deal, China will halt agricultural imports, and American farmers will have wasted money on the new tractors the president told them to buy.

Since Trump enacted his first tariffs on solar panels and washing machines, observers have noted the incoherence of his administration’s trade policy. At times, such as when the USTR office published its report on intellectual-property theft, the White House appeared poised to tackle thorny structural issues. At other times, it seemed the administration sought to roll back globalization altogether and close off the American economy from the rest of the world.

As of phase one, we’ve done neither. Instead, we’ve fed the Chinese leviathan by enshrining state-managed trade without obtaining meaningful reform of industrial policy. Going forward, the U.S. will be more reliant on China than it was before the trade war while continuing to incur the costs of tariffs.

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