The US/China Phase 1 Trade Agreement — All That Glitters Is Not Gold
No one knows this phase one trade agreement will shake out…but one thing is clear, some eyebrows are being raised…and the pattern…
No one knows how this phase one trade agreement will shake out…but one thing is clear, some eyebrows are being raised…and the pattern continues.
BY WAY OF BACKGROUND
Even if you’re only marginally familiar with Donald Trump, then you’re familiar with his brand and his businesses over the years. In them, you may recognize a pattern — in almost every case that he or his organization has endeavored in, it’s gone down in the following manner:
Fanfare and announcement of product/service
Bloviating about its greatness
Limited, if any, success or market share
Donald Trump walks away unscathed and wealthier
Trump: The Game
CAN WE EXPECT MORE OF THE SAME FROM THE POLITICIAN?
The short answer — Yep.
On January 15, after 18 months of a trade war with China, United States President Donald Trump and Vice Premier Liu He of China signed a “Phase 1” trade agreement.
Trump promises to deliver “a future of economic justice and security for American workers, farmers, and families.”
In a lapsed moment, the president managed to tell the truth, this phase one has “total and full enforceability.”
Treasury Secretary Steven Mnuchin proclaimed this as a “big win” for the president but also acknowledged that this phase didn’t achieve all of the reforms they had sought.
The trade war has had a profound impact on both countries and this agreement is believed to be the first step towards creating a more level trade environment between the two countries. Yet as the fanfare fades on phase one and the details begin to emerge there is some skepticism as to what was accomplished.
China has agreed to increase its purchases of goods and services from the United States by “at least” $200 billion over the next two years. This includes:
+/- $38 billion in services
+/- $52 billion in energy products
+/- $78 billion in manufactured goods
+/- $32 billion in agriculture.
The United States also slashed the tariff rate in half for $120 billion worth of goods from 15% to 7.5%.
However, 25% of tariffs are still in place, on $250 billion of Chinese products, for a myriad of items that the United States still purchases.
Much of those tariffs are attached to components that American manufacturers need to assemble and complete their products in the United States. The issue with these tariffs remaining is that American manufacturers have been one of the more affected sectors in America not only since the trade war but for years now. In response to this, President Trump claims that China is paying those tariffs but studies have found that these costs are largely paid by American importers.
Farmers, particularly those in the American Midwest, have been hurt by the trade war. Due to the lack of Chinese demand and low prices, many farmers saw a decrease of close to 50% of the value of their crops. While some of that loss was offset by federal aid, it hasn’t lessened the overall impact.
As Minnesota soybean and corn farmer Kristin Duncanson said in a recent NPR interview:
“We’re optimistic that signing the agreement will reopen opportunities…But I’m also a realist enough to know that until the beans are actually shipped to customers that we can’t count our chickens before they hatch.”
One of the more contentious issues in the trade war surrounded intellectual property rights. A particular irritant for American tech companies that wanted to do business in China. To do so, they were required to provide access to their intellectual property. The Chinese government did this under the auspices of market access and licensing approval. The reality is that Chinese tech companies would co-opt and re-produce that intellectual property and then undercut the American tech companies.
It’s more than likely that this will remain a troublesome issue between the two countries because China has only agreed to strengthen legal protections for patents, trademarks, and copyrights.
To combat pirating of movies, games, and software, China has also conceded to improve “criminal and civil procedures to combat online infringement of pirated and counterfeit goods.”
As world leaders recently gathered in Davos, Switzerland for the World Economic Forum, many trade experts say this first phase of the trade agreement was made to ease tensions. Mexican economic minister Graciela Marquez Colin said this deal is an “intermediate step.”
While in Davos, economists Chad Brown, and Jin Keyu, among others, point out the primary danger of this trade agreement is the impact on the global market. For China to meet its obligations with the U.S., it will inevitably shift purchases from other countries.
Brown, a senior fellow at the Peterson Institute for International Economics, spoke bluntly and has called the phase one agreement a “disaster” and that it doesn’t address any of the “systemic issues.”
Keyu, associate professor at the London School of Economics supported Brown: “You can have Chinese people buying more U.S. goods and somehow the Chinese consumers will have to absorb the 2.4 billion dollars of American nuts and say goodbye to New Zealand, Australian suppliers…”
The baseline year for the agreement is 2017 in which the U.S. share of China’s imports was 9% in those target categories (services, energy products, manufactured goods, and agriculture). According to Bloomberg Economics, that would almost double the U.S. share by bumping it to 17%.
Some countries derive half, or more, of their global sales to China and would be gravely impacted. Countries like:
Angola — 57% of global sales to China
The Republic of Congo — 49% of global sales to China
Mongolia — 47% of global sales to China
It’s worth noting that many of the countries potentially impacted are American allies.
Doubling the U.S. share would have significant consequences on China’s global economic standing — one that they’ve fought very hard for over the past 25+ years.
Many world economic experts agree that the most difficult trade negotiations between the U.S. and China have yet to begin. However, in spite of that and the growing skepticism, the head of the World Trade Organization, Roberto Azevedo said: “The political impact of (the phase one deal) cannot be underestimated.”
China has agreed to almost all of America’s demands for this first phase. During his visit to Davos, the Chinese seeming malleability prompted President Trump to boast that while the deal is around $200 billion the number of purchases could end up closer to “$300 billion.” Of course, this would be contingent upon China following through and adhering to the agreement.
And proper enforcement if neither country stays on point.
This enforcement is important because while China has agreed to end the forced technology transfer to market in China and agreed to strengthen intellectual property protections…they’ve agreed to this before.
The administration and adherence to the trade agreement are paramount to its success. According to the American Action Forum: “Any trade deal is only as good as its enforcement mechanism.” Traditionally, trade disputes have been handled by a neutral panel of experts, not the trade negotiators from the countries involved.
In this phase one agreement, the two countries have created a new trade resolution system. The two countries have decided to resolve any issues on their own. Unfortunately, neither China nor the United States has been fond of resolutions or sticking to them, it’s one of the reasons the trade war lasted 18 months.
As the second-largest economy, behind the U.S., China has proven to be a formidable foe and shown that they won’t be bullied. What this means is that if there is a dispute after this first phase is implemented is that the most likely recourse will be more tariffs…or complete withdrawal by either country.
So yes, President Trump was truthful when he said that phase one has “total enforceability”…because China and the U.S. are the only two countries overseeing its adherence!
A source close to the Chinese Ministry of Commerce was quoted by the Global Times, a tabloid under the official newspaper of the Communist Party of China, People’s Daily:
“We can’t expect that the China-U.S. trade fiction will disappear simply because of the signing of a deal.”
It was also intimated that the signing of phase one will NOT lead to negotiations toward the next round of agreements any time soon.
Not necessarily the most encouraging news from 50% of the signatories on the trade agreement.
The phase one agreement goes into effect on February 14 and has many economists, politicians, manufacturers, farmers, entrepreneurs, and citizens anticipating what the outcome and impact will be.
One immediate outcome is that phase one signing has emboldened President Trump. The president now has the European Union in his crosshairs.
In an interview with CNBC, Trump said that the European Union will “have no choice.”
My advice to the EU — gird your loins.