A Big Week
December 16, 2019
Well, we just had the second big trade week in a row, bringing the year to an end with a bang, although, as usual, there may be less there than would appear at first glance. Several items:
First, a semi-correction from last week. The president tweeted that he was re-imposing steel and aluminum tariffs on Brazil and Argentina, and I naively assumed that since he said it, it was going to happen. Well, he hasn’t imposed tariffs yet, now nearly two weeks later, and White House economic adviser Larry Kudlow indicated a few days ago that “no decisions have been made.” This episode should remind us all of something I said more than a year ago: don’t believe anything the president says until he says it three times.
Last week’s big news that actually did happen was the announcement of an agreement on the United States-Mexico-Canada Agreement (USMCA). CSIS has put out a short piece on what was agreed to, so if you still need details, check out the link here. While the market access gains in the agreement are well known—see the International Trade Commission report of last spring—and did not change much as a result of the negotiations with House Democrats, the conclusion of the agreement restores an element of certainty to the North American trade scene and will cause a lot of people to breathe easier. There were, as always, some winners (organized labor) and losers (pharmaceutical companies), but overall the agreement is a net win-win-win for all three countries.
What I found particularly interesting about it, particularly when looked at in conjunction with the FY 2020 National Defense Authorization Act (NDAA), which the House passed the same day, was that both measures hint at a return to the center in congressional politics, something we have not seen for quite a while. The final version of the NDAA ended up abandoning many of the provisions House progressives had gotten into the House bill, and as a result, wracked up many more Republican votes than it had gotten the first time and lost a good part of the Democratic caucus’s left wing. The USMCA, in contrast, gained the support of organized labor, and with it most likely a good chunk of House Democrats, but left some Senate Republicans fuming that they had been ignored and that Ambassador Lighthizer had made too many concessions to the Democrats.
In both cases, leadership moved to the center and abandoned the outer fringes of their caucuses in order to deliver a product with substantial support. This is good news. It is the way Congress used to operate before descending into partisan rancor. It may turn out to be an accident or simply a one-off (or a two-off?) happening, but it might also be the start of a trend as House and Senate members either remember or learn that if you understand the perfect can be the enemy of the good you can actually accomplish something—and in this case, two good things.
There are Democrats grousing that this hands Trump a victory he will exploit in his reelection campaign. That is a very short-term view that assumes voters will still be thinking about the USMCA next November, which is unlikely. Moreover, my view has always been that good policy makes good politics. It is when Congress fails to act that its approval ratings go down, not when it does something.
Finally, the end of last week featured an announcement—again—of a phase one deal with China. At this writing, many details are not public, and it appears the market access details will not be made public, so it is hard to be definitive about what the deal means. But that won’t stop me from making a few comments.
First, the Chinese agreed to buy more U.S. goods, particularly agriculture. They would not confirm a specific number, but the U.S. trade representative (USTR) is saying they committed to at least $40 billion a year, which would be $16 billion over the 2017 baseline, with a goal of reaching $50 billion in 2021. That would be a significant increase, but it raises the question of whether the United States can produce that much. In 2017, the sum of U.S. exports of soybeans, pork, wheat, corn, and cotton to all countries was $47.2 billion. Fifty billion dollars of exports to China in one year would be more than that total, which would mean abandoning other markets and asking U.S. farmers to literally put all their eggs (and soybeans, pigs, etc.) in one basket—and an unreliable one at that. The decision not to reveal details of the access commitments is unusual and will make it hard for the public to evaluate either the quality of Chinese commitments or whether they are complying with them.
Less detail has been made available so far regarding Chinese commitments on the structural issues. Chapters address intellectual property, technology transfer, financial services, and currency. Although USTR says they are extensive, it appears the “concessions” on intellectual property and financial services are largely repeats of what the Chinese previously promised President Obama but with a footnote that says, “This time we really mean it.” On technology transfer, they appear to be committing to what they committed to in their World Trade Organization accession. They may promise to strengthen their laws, but in a non-rule-of-law country, that is a promise of limited utility.
More telling for the long term is what the agreement fails to address—most of the structural changes the United States has been demanding from the beginning. Those are saved for phase two. I’ve commented in the past on the likelihood of that happening and will surely do so again, but not today. Let’s just say this early read suggests the Chinese gave the United States what it had previously given along with additional purchases they have always been willing and able to make while we held off on new tariffs and gave back some old ones. I think you can decide for yourselves who got the better of whom.
William Reinsch holds the Scholl Chair in International Business at the Center for Strategic and International Studies in Washington, D.C.
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