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Tracking the Trade Conflict with China

11/28/2019

Keeping up with the statements, activities and events relating to the ongoing trade dispute with China requires considerable effort since the objective of concluding any agreement is essentially a moving target. China appears implacable in maintaining the status quo on structural issues. Theft of intellectual property, coercive trade practices and state support for their industries were the genesis of the dispute even more than the negative trade balance. From the U.S. perspective, tolerance and acceptance came to an end with the Administration of President Trump who is relying on tariffs to achieve a settlement on favorable terms to our nation and economy. Predictably China imposed retaliatory tariffs and sharply reduced imports of agricultural commodities impacting the farming community and the industrial sector.

Events over the past 20 months belie the assertion that trade wars are “quick and easy to win”. For those keeping score we have disbursed $28 billion in Market Facilitation Program support to farmers, our negative trade balance with China persists ($40 billion in October 2019) and importers, and consumers alike are bearing the cost of tariffs.

It appeared that we were approaching an agreement after high-level negotiations in Washington DC. on October 10/11. All that was needed according to a White House statement was a “papering” of the decisions. The signing of what is now referred to as the “Phase-1 Agreement” was tentatively scheduled for a meeting in December. In the event civil disturbances in the host nation Chile led to a cancellation of the Conference to have been attended by President Trump and Premier Xi Jinping. Since the October meeting the Phase-1 Agreement has been in limbo with conflicting comments from both Beijing and Washington.

In a Cabinet meeting on November 19th the President threatened to raise tariffs on imports from China unless a suitable deal is concluded. He stated, “If we don’t make a deal with China, I’ll just raise the tariffs even higher”.

The Commerce Ministry of China had expected both nations to cancel some existing tariffs concurrently with signing of an agreement. This understanding was negated by the President who confirmed that he had not agreed to reduce tariffs stating, “They’d like to have a rollback. I haven’t agreed to anything.”

It is understood that “constructive discussions” have taken place by telephone between Vice Premier Liu He and U.S. Trade Representative Robert Lighthizer assisted by Treasury Secretary Steven Mnuchin. The U.S. trade representatives elected not to travel to Beijing in mid-November for face-to-face negotiations since there was no assurance from China that concessions on structural issues would be made.

More recently Larry Kudlow, White House Economic Advisor implied that China and the U.S. were “getting close to reaching a trade deal”.  On November 25th The Commerce Ministry of China suggested that the two sides had reached “a consensus on properly resolving related issues”. Senior officials in China have apparently agreed to strengthen intellectual property rights. Both China and the U.S. appear more amenable to an agreement of sorts. This would probably involve rolling back some existing tariffs and the U.S. suspending imposition of additional duties on imported consumer goods valued at $150 billion scheduled for December 15th. This requirement would be necessary for Premier Xi Jinping to sign any agreement.

Without a detailed knowledge of the topics under review it is difficult to comment on the benefits. Some critics including Stephen Roach of the Yale University Jackson Institute regard a proposed Phase-1 agreement as “hollow” and “flawed” representing a political win for the President without addressing the structural issues that are disadvantageous for the U.S over the long term.

A possible complication with regard to relations with China concerns the legislation supporting human rights in Hong Kong and the open criticism of the response to pro-democracy protests. The Hong Kong Human Rights and Democracy Act now passed by the Senate and the House of Representatives and has receivd a Presidential signature.

At this time a Phase-1 agreement, however thin and focused on issues will be welcome. This would thaw the conflict between the U.S. and China, reduce some tariffs, restore export of agricultural commodities and lower the cost of imports for consumers. Above all it would create an atmosphere for ongoing negotiations conducive to a series of agreements of mutual benefit to both nations. This approach is predicated on the reality that the U.S. cannot simply force a “Grand Bargain” on China irrespective of good intentions and the power of tariffs.