The US and China just signed phase 1 of a trade deal. It is not the colossal victory the Trump administration hoped for, but it is definite progress. Here are the major components of the deal:
- China committed to increase purchases of US goods by $200 billion over the next two years, including $32 billion in agricultural products.
- China agreed to step up efforts to prevent and punish the theft of trade secrets.
- China agreed to eliminate barriers that have prohibited US banks and other financial-services companies from operating in China.
- China commits not to devalue or otherwise “manipulate” its currency in global markets.
- The US cut in half the 15% tariff rate imposed on $120 billion of Chinese products and agreed to defer the additional 15% tariffs on consumer products initially scheduled to take effect in December.
It is fair to question the agreement on four grounds:
- China’s commitment to increase purchases is positive news, although the numbers are targets without enforcement mechanisms. It’s not clear if the Chinese will purchase more that than they would have anyway. If so, the EU might challenge any “trade distortions” created by the deal at the WTO.
- Some important parts of the agreement lack clear timetables and enforcement mechanisms. For example, it’s difficult to tell if and how China will address the theft of trade secrets.
- The deal did not come without a cost. The tariffs imposed on China has created substantial trade uncertainty. The tariffs generated US government revenue and some US companies benefitted, but others did not. American (and Chinese) consumers have paid higher prices as well.
- The agreement does not address all the core issues, including China’s market manipulations through its state-owned enterprises (SOEs).
But phase 1 represents progress. Here’s why:
- The trade problems with China did not develop overnight and will not be solved immediately. China’s leaders and its economy have become accustomed to the status quo. President Xi believes in managed (controlled) markets, not free enterprise. It’s unrealistic to expect the Chinese to embrace capitalism, especially when so many academics and business leaders in the US and EU constantly criticize it.
- Agreements without enforcement mechanisms allow the Chinese to save face while acknowledging essential problems. Enforcement matters, but will likely develop over time if the US is persistent.
- China’s agreement to amend some of its restrictions on foreign financial-service companies is real progress. It opens the doors for US banks, insurers, and other companies to expand into China.
- The US reduced the 15% tariff to 7.5%. It remains, signaling that a “phase 2” deal is needed.
- President Trump is under intense political pressure. To complete the job, he (and future presidents) need a broad bipartisan consensus supporting both the negotiations and the strict measures (namely tariffs) that are required along the way. Instead, Democrats and US media outlets parroted in China portray him as an illegitimate renegade. Beijing knows that the pressure will subside if Trump is not reelected, so there is little incentive to make substantial concessions.
Kudos to President Trump for taking on the Chinese economically. His predecessors talked about reform but were unwilling to take serious steps to achieve it. Phase 1 includes changes that would not have occurred without his efforts. Let’s demand that he and future presidents finish the job with a goal of free trade with China in both directions.