Let’s Make a Deal!

Last week I held off writing about the latest China deal because there was so little actual information available about what was in it. There is still not much information available, but I don’t want to hold off any longer. Besides, the alternative is to talk about Brexit, the other deal of the century reached in the past few days, but that had best wait until after the UK Parliament acts on it, which they did not do definitively last Saturday.

With respect to the China agreement, the Trump administration once again displayed its tendency to say “dinner is served” before the turkey finished cooking. To be fair, this is hardly the first administration to do that, but on the heels of both the Japanese and Chinese deals, they are rapidly turning it into an art form—make the announcement when you think you have a verbal agreement and then hope you can fill in the details later on.

Unfortunately for the administration and prospective beneficiaries like our farmers, the details matter—a lot. For example, the United States says China has agreed to buy $40-50 billion worth of agricultural products. China has yet to confirm that number and has instead said their purchases will match marketplace demands and, by the way, they would like the tariffs scheduled to go into effect December 15 to go away. Even if that is a real number, however, missing so far is the timetable. Fifty billion dollars in a single year would be significant—roughly twice what China bought in its peak year of purchases—and a huge bump from 2018. If it is spread over two years, however, it would not be much more than a return to where they were before all the fuss started, and if it is over more than two years, it would not mean much at all.

There are also rumors of Chinese concessions on intellectual property (IP) and financial services market access. Those could be important, or not, depending on what they are. The Chinese promised President Obama twice they would not steal any more IP; making the same promise to President Trump would not be a big step forward. They also made a financial services commitment in the Obama administration, and if this new one is simply a repeat of the old one, it will not advance the ball. Over the years, the Chinese have proved themselves masters of recycling when it comes to trade promises.

Rumor also has it that the currency manipulation agreement negotiated last spring has been resurrected, although it will be interesting to see how that is squared with Secretary Mnuchin’s determination in August that China was a currency manipulator. Reappearance of the elaborate compliance and enforcement mechanism that was discussed in the spring is also rumored. That could be a significant step forward for Ambassador Lighthizer who has long been skeptical of China’s ability and intention to comply with its agreements and is also fully aware of Congress’ renewed focus on strict enforcement provisions in the United States-Mexico-Canada Agreement and elsewhere.

Missing from the rumor mill and from administration statements is any hint that the Chinese have agreed to significant concessions on the so-called structural issues that the office of the United States trade representative identified in its initial Section 301 report and have been the United States’ key negotiating objectives from the beginning. In other words, we are hearing nothing about subsidies, state-owned enterprises, or forced technology transfer.

Putting all this together suggests that after a year and a half of drama and a boatload of collateral damage, we may be pretty much back where we started. Chinese agriculture purchases will resume at either normal or higher levels, new U.S. tariffs will be postponed (but not permanently tossed aside), old Chinese promises will be recycled, while some tariffs on both sides will remain in effect. And all the problems that we began with remain.

While the Chinese are no doubt quietly smiling at this outcome since they gave up very little that they had not long planned to give up, from the administration’s perspective, the United States is a winner as well in two respects. First, the outcome allows the president to postpone the inevitable until later, which suits his political agenda. You may recall from my previous columns that since the Chinese will not agree to all of his demands, ultimately, he will have to either accept a weaker agreement or continue the war. I think he will do the former, declare it the greatest agreement ever, and try to sell that to the public. However, if he does that too far in advance of the election, he risks having its weaknesses exposed too soon. Best for him is declaring victory a year from now so people won’t know if it’s a bad agreement until after they vote. That means he has to drag the talks out for a year, and, lo and behold, now we have phases. We have seen phase one. You should expect phase two next spring and then the final agreement next fall.

Second, decoupling of our two economies continues unabated, which pleases the hawks in the administration. That is not entirely the result of Trump’s policies; much of it is due to Xi Jinping. Pulling apart seems to be a mutual goal. There is a lot to debate about why that is happening and how far it could go, which will be a subject for discussion another time. For now, it is fair to say that an outcome that allows it to continue is welcome in the White House. So, ironically, both sides are probably happy with an agreement that fundamentally changes very little.

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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