The weekly trade report with L.C.
Critics claim that the Phase One bilateral trade deal just signed by the US and China is a mercantilist, managed-trade Gosplan that will create more rather than less friction between the two countries, further unsettle world trade, and reduce investment. It will also provoke continuing friction between the US and its allies because if China were to seriously try to fulfill the $200 bn. in additional imports that the China trade deal specifies, this could only be done by taking away billions of dollars of orders from exporters in countries that are allies of the US.
Already “The European Union said the [Phase One] U.S.-China trade agreement could violate World Trade Organization rules and held out the prospect of a legal challenge,” Bloomberg reports. “EU Trade Commissioner Phil Hogan said his team will scrutinize whether China’s pledge to increase purchases of U.S. goods and services by at least $200 billion over the next two years is WTO-compatible.”
The deal was signed in a White House ceremony on Jan. 15th – President Trump for the US and Vice Premier Liu He for China – and enters into force in 30 days. The 86-page agreement’s main text was also released on Jan. 15th, except for a classified annex.
The classified annex
Why the annex has been classified is something of a puzzler, but its intent is likely to screen from allies to what extent their exports are about to be poached and from the US public when China’s purchases for products in the annex have failed to materialize.
David Stockman, former director of the Office of Management and Budget under President Reagan, is telling his subscribers that the managed trade features of the administration’s China treaty are best compared with the former Soviet Union’s Gosplan and that it and will create a bonanza for K Street lobbyists — as companies compete to be first in line at the managed-trade feeding trough. Draining the swamp will be postponed until mañana.
It is possible that China deliberately played upon President Trump’s mistaken belief that managed trade would benefit the US. The Chinese may have realized that the likely consequence of the US demanding that China shift an additional $200 bn. of its imports to the US exclusively would poison the US alliance to contain China and also increase US domestic conflict between the winners and losers of the hyper-protectionist trade deal.
Deja vu?
China has made commitments in the past similar to those repeated in the Phase One trade deal. In fact, the main complaint that has arisen from the US business community in recent years is not that China doesn’t make promises to abide by the rules but that it habitually breaks them. So it remains to be seen which provisions will have an impact. US Trade Representative Robert Lighthizer said he expects the US will be able to determine by spring if the deal is enforceable.
The agreement immediately came under strong criticism on four main grounds:
- It doesn’t deal with the structural issues in a meaningful way, especially the key problem of government subsidies, above all to state-owned enterprises. These subsidies lead to excess capacity.
- It would require an intensification of central planning and government control over commercial decisions in China if its terms were to be carried out.
- It appears to break WTO rules by requiring managed trade – setting specific amounts that must be imported – and is unfair to China’s other trading partners. (Under the GATT 1994, a WTO member “shall not seek, take or maintain any voluntary export restraints, orderly marketing arrangements or any other similar measures on the export or the import side.”)
- It raises rather than removes trade barriers – a complaint also lobbed against the revised US-South Korea Free Trade Agreement, the USMCA, the Section 232 tariffs, and US actions at the WTO.
Meanwhile, it’s beginning to be wondered whether the US refusal to allow new judges to be appointed to the WTO Appellate Body is to promote reforms, as the government publicly claims, or rather to terminate the WTO so that it can’t function as an obstacle to the US shifting to a bilateral managed-trade regime with all its trading partners.
Tariffs still remain on both sides
About $370 billion of US imports from China remain under Section 301 tariffs, with the result that the average US tariff on Chinese goods is now about 19.3%, far above the 3% where it stood before the outbreak of the tariff war.
China retains at least some of its counter-tariffs on about $110 billion in US exports. This means continued pain for the affected US exporters. It also makes it more difficult for China to meet its vow to boost purchases of US products. Beijing did, however, say it would continue to waive some of these tariffs in order to support increased imports.
The purchase commitments raised eyebrows. They are so specific that they are hard to make sense of in a world of floating foreign exchange rates and commodity inflation and deflation that cause the prices of traded goods to change daily. Overall, China committed to buying “at least” $200 billion more from the US over the next two years compared to 2017. The agreement further specifies, even more granularly, the dollar amounts of specific items to be purchased. Some of this is in the classified annex. It also says the parties project that “the trajectory of increases in the amounts of manufactured goods, agricultural goods, energy products, and services [imported by China from the US] will continue in calendar years 2022 through 2025.” Note that this is a projection, not a commitment.
These projections masquerading as commitments will likely be the source of many rancorous disputes between the two countries as well as between the US and its other trading partners.
Increase exports…but not in the tech products China wants
Increasing US manufactured-goods exports to China could be especially difficult given that China’s biggest global import is semiconductors, just the item for which the US is looking to enhance restrictions on sales to China on national security grounds. In fact, China has long countered US pressure that it import more by pointing out that if the US lowered its export controls on China, it would immediately boost its imports, focused on now-forbidden expensive high-tech US products.
Currently the US government is considering a number of moves that would further restrict sensitive exports to China.
This raises the question of how committed China will be to the deal’s specified purchasing levels and what happens if it falls short?
The trade agreement’s text says that “The Parties acknowledge that purchases will be made at market prices based on commercial considerations and that market conditions, particularly in the case of agricultural goods, may dictate the timing of purchases within any given year.” This apparent undercutting of the point of the specified purchase levels was reinforced by comments that Liu He made at the signing ceremony. He told reporters that Chinese companies will buy US goods “based on market conditions” and “if the demand” is there.
Escape clauses for both sides
If disputes can’t be settled, either country can retaliate or withdraw from the phase one trade agreement. Dispute settlement will be handled by a bilateral settlement set-up that is independent of the WTO.
At the signing ceremony the President made a series of statements that overreached to such an extent that they provoked additional skepticism about the deal. He said, “Today we take a momentous step, one that has never been taken before with China…. A major step for world peace…. It just doesn’t get any bigger than this…. a historic trade deal…. righting the wrongs of the past and delivering a future of economic justice and security” with a deal that has “total and full enforceability.” But China has had in force for many years now comprehensive free trade agreements with many trading partners, including Australia and South Korea and is seeking to finalize the RCEP with 14 other countries – agreements that go beyond what the US obtained in Phase One, though those deals were not based on managed trade and were WTO-compliant.
The critics
Phase One has already come under strident criticism in the US. Chad Bown of Peterson Institute for International Economics didn’t mince words. Titling his analysis “Trump’s Trade deal with China is Communism with American Characteristics,” he said it signaled the administration saying “We’ve given up on attempting for you to become more market oriented.” PIIE’s Gary Hufbauer called it a “resort to Soviet-style managed trade” and called the secret annex on specific purchasing commitments “right out of the handbook of a planned economy.” It represents a “radical change in US policy and conveys a troubling message to the rest of the world.” The USMCA, he says, “dipped its toe into managed trade,” but Phase One “is complete immersion. Price signals are out, quantitative commitments are in…. Other countries may complain; over a longer period, they are likely to emulate.” Other analysts noted that both the USMCA and Phase one, unlike past trade deals, “largely raise rather than remove barriers to trade.”
The head of the EU Chamber of Commerce in China also charged that the deal is “managed trade” that will hurt China’s other trading partners. EU Trade Commissioner Phil Hogan said the same, noting it will unfairly skew China’s aircraft purchases from Airbus to Boeing. Hogan added that Brussels will monitor the pact closely as it is implemented. It is unclear how the bilateral agreement might mesh or conflict with the Trilateral EU-Japan-US effort to curb China’s abusive practices.
The Democrats took advantage of the sour response by many to the agreement. Senate Minority Leader Chuck Schumer (D-NY), calling the deal a “historic blunder,” said, “Though President Trump is touting this agreement as the ‘biggest ever,’ I believe the stunning lack of substance and long-term reform achieved will harm American workers and industry.” He noted in particular that it doesn’t address subsidies, dumping, state-owned enterprises, or cyber-theft. House Speaker Nancy Pelosi said the signing was a “showy television ceremony to try and hide the complete absence of concrete progress.” Other Democrats lobbed similar critiques largely centered about the lack of provisions on the structural issues and lack of strong enforcement. Piling on, AFL-CIO head Richard Trumka denounced the deal for not dealing with China’s labor rights abuses as well as not addressing subsidies and state-owned enterprises.
Notably, none of the Democrats criticized the managed trade, Gosplan aspect of the Phase One deal. In fact, they pushed the USMCA, over which they had considerable last minute influence, in that very direction.
L.C. reports on trade matters for business as well as Founders Broadsheet.
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