"One of the greatest trade deals ever made!" seems more like a poorly thought through prop for political theatrics
Most of the reporting I've seen on the US-China trade deal seem to agree that the ‘phase one deal’ between China and the USA is not all that American President Donald Trump hyped it up to be. For one thing it’s short, only 94 pages. Compare that to the European Union-Japan free trade deal that went into effect in February of 2019, where annex 1 is 562 pages, and the total is much more. It’s also quite disappointing that over a year of trade war which was meant to put pressure on China to get the best deal ever ended up being delayed to a future deal with only a limited phase one deal now. Personally, I don’t think there will be a phase two deal as I doubt America sees a comprehensive trade deal with China as being in its interest. Ricardo’s economic theories would tell you that it’s always in everyone’s interest to trade without barriers as comparative advantages makes it make sense to specialise and trade for all that one isn’t specialised in. By trading freely both sides would make absolute economic gains, but as anyone who has studied international relations knows, international politics is about relative gains. In other words, while it might be best for both China and America to trade freely in terms of economics, if China loses more than the US does by not trading freely then it makes sense for the US to impose tariffs. This is also why the phase one deal has such poor dispute settlement mechanisms, if China doesn’t behave the US wants to be able to restart the trade war.
While the deal was disappointing it was also strange given the Trump administrations’ rhetoric. It has as mentioned weak dispute settlement mechanisms but the President is always on about how other countries take advantage of the US. If the US is the party which is taken advantage of then surely it would want strong settlement mechanisms? Another oddity with the phase one deal that I haven’t seen anyone else discuss is the disconnect between Trump administration policy and rhetoric on trade with China in terms of currency manipulation. The President have repeatedly publicly accused China of manipulating its currency yet in the phase one deal one of the most talked about provisions is the mandated imports of US manufactured and agricultural goods. The problem with this policy is that the there is no set amount of American goods China has to import, instead the imports are expressed in US dollars. The rhetoric coming from the White House has been that China acts with the intent to cheat the United States by any means necessary, amongst other things its currency. I’m not qualified to comment on whether China really does manipulate its currency, or the effects of that if it does in fact artificially strengthen the renminbi. But if we assume for a moment that China does manipulate its exchange rate, then it would make far more sense to mandate exports in terms of units rather than currency. 100 cars will always be 100 cars but $100 depends a lot on the exchange rate, and while movements in exchange rates are often small enough that it only matters on the margins for individuals that isn’t the case when dealing with $200 billion.
I find this part of the deal quite confusing. In my view there are three explanations for why it ended up in the deal in the form it did. The first explanation is that the Americans wanted to set an amount in units, but the Chinese refused so the Americans budged in order to get a deal at all. The second explanation is that Trump’s rhetoric is only rhetoric and that it was only meant as big number to brag about on the campaign trail in order to boost the President’s re-election campaign. The final explanation is that the current administration has had problem getting talented negotiators and policymakers due to the President’s dim view of trade, habit of firing people, and difficulty in filling any political appointments which have to be passed through Congress leaving the administration with a team that just didn’t see the connection between currency manipulation and mandated exports in dollars. The truth is obviously somewhere in between, and I personally think the most important factor was that the goal, I think, was to craft successful political theatre rather than successful trade policy.
What do you think? Is the phase one deal a good deal? Will there be a phase two deal? Why did the deal end up the way it did? Please share your thoughts in the comments, I’d love to hear what you think. If you liked this post you can read more of what I’ve written on trade here.
Written by Karl Johansson
