Donald Trump (left) and Xi Jinping in previous trade deal talks CREDIT: KEVIN LAMARQUE/REUTERS President Donald Trump's decision ...
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| Donald Trump (left) and Xi Jinping in previous trade deal talks CREDIT: KEVIN LAMARQUE/REUTERS |
Trump and his advisers insist there will be a “phase two” deal that addresses the big, structural issues in China’s economic policies, from the government’s support for state-owned enterprises to forced technology transfers. But in the meantime, which could be rather long, American businesses and consumers will continue to face higher costs because most of the tariffs imposed on China over the past 18 months will stay in place.
So why is this deal, so heavily promoted by Trump, doing so little to undo the effects of the trade war? And what does that mean for the American economy? A big reason for the limited tariff relief is that this agreement appears to be more about reelection politics in the U.S. than it is about China reforming its economic policies. Trump’s strongest talking point in the campaign is the relative strength of the American economy, so getting a cease-fire in the trade war that would avoid further escalation and reduce uncertainty was one big goal. In addition to that, there is a major weakness in selling his story of economic success: namely, declining incomes and increasing bankruptcies among American farmers—due in no small part to the trade war. More recent data also shows that the U.S. manufacturing sector is contracting, but this “phase one” deal does little to address that.
The core of the deal, at least from Trump’s perspective, is an apparent commitment from Beijing to increase its purchases of U.S. agricultural commodities. Trump has asserted that the Chinese will more than double the recent peak value of these imports to $50 billion. Other administration officials have said the official figure is closer to $40 billion. The Chinese have said only that they will increase purchases in line with demand and to the degree that quality products are available. Earlier this month, a Communist Party-linked newspaper pointed to the continuing discrepancies in official statements and suggested delaying the signing of the agreement to avoid misunderstandings and further conflict. We’ll see when we get the text.
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| A container ship docked at a port in Qingdao, in eastern China’s Shandong province, Aug. 6, 2019 (Chinatopix photo via AP Images). |
Why are China’s concessions in the “phase one” deal so focused on agriculture, and why is the tariff relief in the U.S. market so stingy?
And that’s not a good thing for the U.S. manufacturing sector, according to other new research. The tariffs that were cut or postponed were primarily on consumer goods, while the tariffs that remain are mostly on industrial products—an additional 25 percent on $250 billion in imports—and that raises costs for American firms using them as inputs to their production. Two economists on the staff of the Federal Reserve Board recently found that, far from bringing back jobs as Trump has claimed, “U.S. manufacturing industries more exposed to tariff increases experience relative reductions in employment.” That is because any protection from imports they receive is “offset by larger negative effects from rising input costs and retaliatory tariffs” that reduce export competitiveness.
So why does the “phase one” deal look like this? Why are China’s concessions so focused on agriculture, and why is the tariff relief in the U.S. market so stingy? On the first count, as I have noted repeatedly, and as others have pointed out, Trump’s trade wars have hit America’s farm sector particularly hard. Farmers, already grappling with bad weather and softer prices globally, have also had to contend with falling exports as a result of China’s retaliatory tariffs on soybeans, pork, wheat and other products. Many farmers have been driven into debt and bankruptcy. Without nearly $15 billion in bailout payments for producers hit by the trade war, income in the sector as a whole would have dropped below the already low levels of 2018. But an extensive analysis by The Washington Post, among others, shows those payments have gone overwhelmingly to larger, less needy operators.
So Trump needed something for a constituency that, so far, remains one of his most loyal in Midwestern states that voted overwhelmingly for him in 2016. There are several possible reasons that the manufacturing sector and the rest of the U.S. economy were largely ignored in the deal. One is that industrial goods were chosen for the initial rounds of China tariffs precisely because they are less visible and the effects less immediately obvious. Indeed, Trump still likes tariffs and continues to insist that Chinese exporters, rather than Americans, are paying them. Highly technical research papers—no matter how rigorous—are simply no match for Trump’s very public and fictitious claims about the benefits of tariffs.
A second reason for limited tariff relief in this deal is that China hawks inside and outside the Trump administration were opposed to it. Some of those concerned about the current levels of economic integration between the U.S. and China welcome the disruptions to China-focused supply chains, even if they don’t view tariffs as the optimal tool for such restructuring. And for those who don’t want substantial decoupling, but do want to do business with a significantly reformed China, the tariffs are leverage for what they hope will be a far more ambitious “phase two.
” Given what is known about this “phase one” deal, it entails few if any new commitments to protect intellectual property or prevent forced technology transfers—just reaffirmations from Beijing that it will more vigorously enforce commitments it has made earlier. And the agreement apparently does nothing to address the substantial subsidies to state-owned enterprises and targeted sectors that so distort global markets. With the White House set to sign off on a deal essentially designed to shore up support among a key part of Trump’s electoral base, it is also leaving swing states in the Rust Belt, like Ohio and Michigan, paying the price of higher tariffs from his trade war. How will that shake out come November?
Kimberly Ann Elliott is a visiting scholar at the George Washington University Institute for International Economic Policy, and a visiting fellow with the Center for Global Development.
