Tag: trade

The Phase I trade deal between the U.S. and China, signed January 15, brings some needed reprieve to a two-year period of punitive tariffs and disruption to businesses and commercial ties. Any pause in the trade dispute, with or without future purchasing commitments, is a positive sign for Washington state.

But businesses should not be content with the current deal. The text is both a mix of unenforceable guiding principles and aspirational Chinese import levels, made all the more unrealistic given the worsening coronavirus crisis.

The greater flaw is the bilateral structure of the deal. Modern trade is a multilateral activity. A multilateral agreement, akin to the Trans-Pacific Partnership, is a more effective mechanism for applying constructive pressure on China, encouraging China to implement reform according to established standards.

On the positive side, the U.S. will forgo, for now, the implementation of additional punitive tariffs on Chinese imports originally slated for last December. However, elevated tariffs still apply to $360 billion in Chinese imports to the U.S. will remain in place for the foreseeable future. These remaining tariffs cover almost two thirds of all products Americans buy from China.

But more substantive issues are left off. The intellectual property section, core to our large tech industry, while including provisions such as shifting the burden of proof from the accuser to the accused, lacks necessary reforms needed to implement these changes.

Chapter 2 prohibits forced technology transfer, the occurrence of which China denies. The section on macroeconomic policy calls for an end to currency manipulation, even though of late China has been defending—not devaluing—its currency. China’s easing of non-tariff barriers on meat imports coincides with a massive reduction in supply decimated by African swine flu. Opening of financial markets in China was already underway, though the deal expedites this process.

But perhaps the most specific and ambitious element of the deal is Chapter 6, concerning expansion of trade, and specifically U.S. exports to China.

The deal calls for a $200 billion increase in U.S. exports over a two-year period, compared against export levels in 2017. According to the text of the agreement, China will commit to purchasing an additional $77.7 billion in manufactured goods, $32.0 billion in agriculture products, $52.4 billion in energy products (such as liquified natural gas and crude oil), and $37.9 billion in services. That means U.S. exports in 2021 would need to nearly double over 2017 levels, or about 82%.

Washington businesses could benefit of these commitments. During that base year of 2017, Washington state sold $23.1 billion worth of physical goods to China, or about 20% of all U.S. goods exports to China that year (aircraft made up $20.9 billion of Washington’s total). But last year, our exports, after netting out some pass-through products, fell nearly 70%, though most of this came from reduced aerospace exports.

Are these levels realistic? The text of the deal acknowledges these sales will be according to “market prices based on commercial considerations,” though this is at odds with the quota-like structure of the agreement. The success of this deal, and a potential “Phase II” (or “2a” and “2b”) will hinge on several factors, not least of which China’s ability to fulfil these commitments.

But that might be a dubious expectation. Even before the trade war, China’s economic growth model was running out of steam, hindered by excessive lending to state enterprises and rising labor costs. In 2019, China’s economy grew an estimated 6.1 percent—down from growth as high as 14 percent in 2007—and is projected to dip below six percent in 2020 and experience a sustained slowdown over the next decade. Its economy has become more dynamic but remains structurally imbalanced. It’s unclear whether China can expand their total imports with U.S. exports, or rather purchase more goods from the U.S. at the expense of our allies. Managed trade might benefit some but may still hold back global growth.