U.S.-China Trade Talks and the CBO Report
February 4, 2019
Andrew Schwartz: I'm Scott.
Bill Reinsch: I'm Bill.
Bill Reinsch: And we're The Trade Guys.
Andrew Schwartz: And we're The Trade Guys.
Andrew Schwartz: You're listening to The Trade Guys, a podcast produced by CSIS where we talk about trade in terms that everyone can understand. I'm H. Andrew Schwartz and I'm here with Scott Miller and Bill Reinsch, the CSIS Trade Guys.
Andrew Schwartz: In this episode, we'll talk about the U.S. And the Chinese negotiators who are this week, wrapping up talks in Washington as they try to hash out a deal.
[Donald Trump via news clip]: I think that probably the final deal will be made, if it's made will be made between myself and President Xi.
Andrew Schwartz: Plus, we'll talk about the Congressional budget office report that says that U.S. Trade barriers will hurt the economy. Finally, we'll talk about what Congress is doing about all of this. All, on this episode of the Trade Guys.
Andrew Schwartz: Well, two-thirds of the Trade Guys are coming to you today from frozen Washington D.C. Although we shouldn't complain because our countrymen in Minnesota and in Chicago are really freezing. I hear New York is bad but Trade Guy Scott Miller has escaped to not quite sunny Florida but he's in Orlando today and Scott tells us it's about 56 and cloudy which is about many, many degrees warmer than it is here. Bill and I are sitting here, shaking. It's so cold.
Bill Reinsch: When I got in my car this morning, it was seven. [crosstalk 00:01:28].
Bill Reinsch: It was seven. Seven degrees. By the time I got to CSIS, it was 10.
Andrew Schwartz: 10 degrees at CSIS.
Bill Reinsch: Well outside.
Andrew Schwartz: How are you doing down there, Scott?
Scott Miller: Just fine. Having a great, relaxing week. I won't gloat and well it's cooler than we expected. It's definitely warmer than any place else we would have been in northerly latitudes.
Andrew Schwartz: Good. Well, you're kind to join the Trade Guys today from a remote location. We've got a lot to talk about. First, China. The negotiations between the administration led by Bob Lighthizer with Vice Premier Liu are concluding today in Washington, concluding where President Trump will meet with Liu and the hopes are, at least reported by Bob Davis and Lingling Wei of The Wall Street Journal is that China's counting on a meeting between President Trump and President Xi, sometime after the President's meeting with the North Korean leader in February to settle this trade fight.
Andrew Schwartz: What do you guys think of this? Scott, do you want to weight in first since you're far, far away?
Scott Miller: Sure. I think how we always expected this thing to play out that ultimately China would not be able to conclude an agreement that did not have Xi's stamp on it nor would the U.S. conclude an agreement without the President's stamp since he has personalized this to such an extent. Clearly, that's what the tweets from President Trump announced today. For me, the more important question is what the substance of the deal is rather than how it's formed. My concern is that with leaders in the room, we're more likely to have sort of a transactional deal instead of a transformational one. But, we can talk more about that.
Andrew Schwartz: Right. So, Trump today as you mentioned, Scott, tweeted, "No final deal will be made until my friend, President Xi and I meet in the near future to discuss and agree on some of the long-standing and more difficult points." That seems like a pretty reasonable tweet. What do you think, Bill?
Bill Reinsch: You could see it coming miles and miles away. The President has to be the center. He has to be the center of attention. He has to be the decision maker. He wants to make the one to cut the deal. The fact that he tweeted that and flagged it tells me, I think that he's certainly open to a deal. I think would like to come away from that meeting with, waving a piece of paper and say, "I did it." And of course, as we've all discussed many times here, it will be the greatest deal in the world and certainly better than-
Andrew Schwartz: A beautiful deal.
Bill Reinsch: It'll be a beautiful deal. It'll be better than anything that his predecessors negotiated. He wants to be the one to do it which actually makes sense anyway. Nobody should be surprised because this whole thing was set up at his level in Buenos Aires and it makes sense that it would conclude at his level and he has been very clear on many issues for the last two years that he really is his own U.S. Trade representative. He has not hesitated to reject things that any of his trade advisors have brought him. So, it rests on his shoulders.
Andrew Schwartz: Yeah, so is the pressure on him to make the deal?
Scott Miller: Well, it's always been on him when you really step back from it. He's the one who picked the fight. He's the one who escalated it and made it personal. Frankly, it's his reelection next year which is in jeopardy if the economy declines as a result of a bad deal or no deal.
Andrew Schwartz: So, does he take blame for that? I mean, does he get blamed for that?
Bill Reinsch: Well, I think there's a bunch of people in the administration on this one who are going to do their best to save him from himself and try to make sure that whatever gets on the table for this final meeting is as airtight as they can possibly make it. There's going to, I think everybody figures, there's going to be three components, a market access component where the only question is, is it going to be big enough for Trump? You can probably figure that out in advance. There will be a structural change component which we've talked about before which I think cannot possibly go 100% of the way to where what we want. But, has to be more cosmetic so people won't laugh at it.
Bill Reinsch: And then I think what you're going to see a lot of February taking up with is a very fraught negotiation over compliance, enforcement and monitoring. Ambassador Lighthizer in particular, he's not the only one really believes that the Chinese will not honor their commitments and that you need a lot of monitoring systems, you need a lot of deadlines, you need a lot of snapback provisions built in so that if they don't honor it, we get to do certain things in response.
Andrew Schwartz: There's real consequences.
Bill Reinsch: There's real consequences. All that stuff needs to be negotiated. I've had to do that with the Chinese and when I was in the government. They really hate that because for them, these are all violations and infringements on their sovereignty which is an exaggeration but that's what they think.
Andrew Schwartz: And they feel like it's a slap in the face.
Bill Reinsch: Yes. Yes. Well it is actually and they're right to feel that way. But they also have a record of not always complying so I don't think that Lighthizer's view is misplaced. The point is that, I think from Lighthizer's point of view, if you're going to put the two presidents in a room where they might agree to something, you want to get as much of this stuff possibly nailed down as you can. Trump does not have a history as a detailed guy and if you don't get it in the paper beforehand, it may disappear along the way.
Andrew Schwartz: Isn't there some pressure on actually where the meeting is physically too because if it's in Hainan as the Chinese seem to hope it will be, it's on their turf and if Xi doesn't walk away from a deal, with a deal on their turf, he loses face there? Isn't there, there's some real optics here as well at play.
Bill Reinsch: Oh always. Always. I would think they would end up with a third country venue.
Scott Miller: Yeah. That seems most likely to me as well. Singapore or somewhere with at least the sheen of neutrality but have it in a third country. But Bill's right. The transactional part, the market access part is the one that's, I think easiest to predict and where it's easiest to declare victory. The concerns about compliance are important. What I hope the negotiators are actually focused on are the things that would improve the circumstances for markets and for U.S. participants in the Chinese market that are also in the interests of China because those are the ones that are most likely to stick over the long-term. They'll need less ongoing monitoring.
Scott Miller: Things like getting rid of joint venture requirements for foreign investors which is good for China in terms of boosting the return on investment and therefore making investments more likely. But it's also good for the intellectual property of the foreign firms because they have less influence from Chinese cronies on the board who cause intellectual properties to leak. So, things like that or anything to improve the contestability of the banking and financial services sector, banking, insurance payment systems which are not particularly contestable now. Making them more contestable is good for China's economy. It forestalls or perhaps even prevents a banking crisis which may be in the cards if the system stays closed but also it would improve circumstances for U.S. firms contesting the market.
Bill Reinsch: I'm glad you mentioned the joint venture thing because that is the one thing that they can do that is really important and would make a difference I think to the fundamental change, structural changes that the administration is looking for. There's been some debate lately about the new foreign investment law that they promulgated in the, presumably their legislature will pass in March which has a lot of loopholes, a lot of exceptions like a national security exception that sort of swallows the rule. But, what has happened in China a good bit is that the Chinese government doesn't usually demand technology transfer as a condition of allowing companies to go in. They said in their WTO accession, they wouldn't do that and they stuck with that.
Bill Reinsch: But what happens is they say, "If you want to come in, you have to have a joint venture partner." And then the joint venture partner demands the technology transfer and says, "I won't be your partner if you don't." And the Chinese government can say, "We have clean hands. We haven't demanded anything. What the companies negotiate amongst themselves is up to them and not something that we can dictate," which by the way would continue to be permitted I think in their new proposed law. But if they get rid of the requirement that you have to have a joint venture, that allows companies to come in and avoid a lot of that. So, Scott is exactly right on that. It's an important, really important issue.
Andrew Schwartz: Well, so far though, the Chinese, this week in Washington and we're taping this on Thursday, basically they delivered a package of very modest concessions. Why is there optimism if they're only delivering modest concessions? I mean Trump has said, in fact he tweeted, "China does not want an increase in tariffs and feels they will do much better if they make a deal. They are correct."
Bill Reinsch: Who said that was optimism?
Andrew Schwartz: I'd sense in the press that there's some momentum and there's some optimism. I don't sense that from the Trade Guys.
Scott Miller: I think that there's optimism that things will not break down completely and will have tariff escalation and decoupling. So there's that much optimism in the markets but I think you've got a, the notion of optimism on these deals is quite fungible because remember the NAFTA was the worst trade agreement in the history of the Earth or at least since the continents formed. It's the worst trade agreement ever. It was changed in relatively, relatively modest ways and now it's the best ever, it's the best and biggest ever. So, the declaration of victory is not nearly as important as avoiding the downside.
Scott Miller: To continue the NAFTA analogy, what traders really feared was the loss of NAFTA entirely and the downside risk was greatly minimized once USMCA was agreed even if there wasn't much upside. So I think that's, you've got to calibrate it. The public statement, particularly the statements of the administration are often at odds with the real sentiment of the traders themselves.
Bill Reinsch: We had a meeting here last week with a bunch of people that think about this a lot. Some companies, CSIS people, other think tanks, some foreign embassy representatives, not Chinese and one of the questions that was asked was sort of what do you think is going to happen? And about two-thirds of them thought the most likely outcome by March 2nd was basically a punt. Continue talking, not enough progress to close a deal but enough progress to continue negotiations without further tariffs, no lifting, no imposition.
Bill Reinsch: Most of the rest thought there would be a what was characterized as a small deal, not really defined but which I would say is you know, a big marketing access package but something slightly more than cosmetic on the structural change issue and not much more than that and some enforcement provisions. But, I don't think there's raging optimism in town that this is all going to have a happy ending in the short term.
Andrew Schwartz: Switching gears a bit, speaking of happy endings. This week, the Congressional budget office came out with a new report that says that U.S. Trade barriers will hurt the US economy. They said, "U.S. Trade barriers will hurt rather than help the economy and levies that President Trump is imposed on items including steel, aluminum and some other Chinese goods will cut real gross domestic product by about 0.1% on average through 2029 and it's going to fuel uncertainty among investors which may further reduce U.S. Output."
Andrew Schwartz: Scott, what do you think of that?
Scott Miller: Well, in some ways if you've taken anything beyond a basic course in economics, it's kind of a blinding glimpse of the obvious. Look, trade barriers are, they're taxes basically. Any time you add taxes, you'll slow growth and almost every trade economist would agree that the ideal circumstance for growth are no barriers to trade at all. Now that's very difficult to achieve. And in fact the U.S. Economy, while it is massively open in many respects, does not have zero barriers. So basically Hong Kong and Singapore are the two economies in the world who actually execute this principle with no trade barriers.
Scott Miller: But the ideal position for economic growth is always open markets and any time you add barriers whether they're tariffs or quotas or whatever it might be, those taxes on, border taxes or other frictions added to the system will always slow down growth. So, the fact that that's the conclusion is not surprising. The dimension does help because CBO has done a pretty fair job and it's very similar to things we've seen from other research institutes, the Mercatus Center published some things about this. I believe the Cato Institute has published on it. So having the official government record keeper and the Congressional budget office weigh in and the magnitude of the total economic losses is roughly in line with those previous private reports.
Scott Miller: But the fact that it does that is not surprising. I hope somebody's paying attention because in a $17 trillion economy, even a tenth of a percent of growth matters.
Andrew Schwartz: That's right.
Scott Miller: It's real money. It's real jobs.
Bill Reinsch: It is real money but Scott, were you surprised it wasn't bigger than that? I was.
Scott Miller: I wasn't because this about the order of magnitude that the private studies have shown. The fact is because the U.S. economy is so large and almost or a little over two-thirds of it is domestic economy. Keep in mind trade is a big but it's only about a third of economy. About 80% of trade is goods whereas about 80% of the U.S. Economy is services. So, there's a lot of things going on in the U.S. economy that would offset this. When you look at, actually we've had this conversation a number of times which is when the tariffs go on, nobody can find it in the monthly employment or growth numbers and one of the reasons is the actual effect versus the broad stimulus that's going on in tax cuts and other spending is relatively large on a macro standpoint by an order of magnitude or so than the effects of trade per se.
Bill Reinsch: There's something else going on that I'm going to write in my column about this week that is really interesting and I have to think about it some more but-
Andrew Schwartz: But we're going to get a preview here.
Bill Reinsch: We're going to get a preview yes, a trailer, you know.
Andrew Schwartz: Good.
Bill Reinsch: The McKinsey Global Institute put out a report that concluded that while trade continued to grow in absolute terms, its share of total output was declining.
Andrew Schwartz: What does that mean?
Bill Reinsch: What it means in their study is that we're making more stuff, more stuff is being consumed domestically and not going across borders and this is in contrast to services and data which is what triggered this thought when I was listening to Scott. On the good side, what they see happening is really big economies like China and India are undergoing little, medium consumer booms of their own. People are buying more stuff in China and India and they're buying Chinese and Indian stuff. They're developing supply chains in country and basically they're developing domestic markets which is exactly what we've been urging them to do for a long time, to base their economic growth on consumption and not on exports.
Bill Reinsch: So this is healthy. What it does mean though is that while exports grow, they're not growing as much relative to growth in services and data transfers which are big American economic strengths. The extent that tariffs apply entirely to goods, really, you can see why the impact maybe wasn't as big as at least I would have thought because I'm not as smart as Scott is.
Andrew Schwartz: No one is as smart as Scott is.
Bill Reinsch: This is true. No one is as smart as Scott is but part of it is because as Scott said, our economy is increasingly a services economy which is in a way good because that's in the area of global growth.
Andrew Schwartz: Well, so one thing though to keep in mind for those listening out here, the CBO, the Congressional Budget Office is nonpartisan and so how seriously are both sides of the aisle going to take this report?
Bill Reinsch: Well, both sides of the aisle are famous for, if they agree with it, they'll exploit and if they don't, they'll ignore it.
Scott Miller: That's been the pattern for decades with CBO's work unfortunately on any subject, not just on trade policy.
Andrew Schwartz: But people like you guys respect the work and economists respect the work and one of the things that shows here also in their report was by 2022, real private investment will be down by three-tenths of a percent. That's real money too.
Scott Miller: That for me is the concerning part of the report. We've talked about it before on our program which is the uncertainty is the enemy of prosperity. What you really want to raise growth rates and to keep them growing, keep them at sustainable high levels is a predictable business environment. Predictability is best and for me, the real harm that's been done by the President and his team with the continuing threats of tariffs and quotas, the continuing threats of pulling out of agreements is created uncertainty within both the domestic and international economy that is ultimately damaging to the interests of those of us who feel like growth solves so many problems that you want as much of it as you can get.
Bill Reinsch: The thing that's depressing about that and I think you're right. I think the depressing part about it is that it's deliberate.
Scott Miller: Oh yeah.
Bill Reinsch: If you listen to the President, he thinks uncertainty is good because it keeps his negotiating partners off balance and increases his leverage. That may be true but at the same time as Scott pointed out, it keeps everybody else off balance too. When they're off balance, the first thing they do is they hold on to their money. They don't invest and if they don't invest, then we don't grow. Trump doesn't seem to see the connection between the uncertainty he's creating for the Chinese and the uncertainty he's creating for the American business community by the same actions.
Andrew Schwartz: Let's switch gears a little bit. Since we're talking about Congressional Budget Office, does Congress understand this issue? I mean there's couple of pieces of legislation that are going to be floated in Congress next week. Tell us about that.
Bill Reinsch: It's going to reflect Congressional division. There are two bills coming up that, they're not coming up for consideration. They're going to be introduced that are essentially polar opposites. One of them, from Senator Toomey and Senator Warner and others and some people in the House side. This one is bipartisan would reign in the President's tariff authority, particular with the steel in aluminum tariffs.
Andrew Schwartz: Restoring more power to the Congress.
Bill Reinsch: Restoring, it would require, President wants to impose tariffs for national security reasons which is that Section 232 issue that we've talked about. He would have to get Congressional approval each time before he can do it and the interesting thing about the bill is it's retroactive. So, it would have to go back and cover the tariffs. Congress would have to approve the tariffs that he has already imposed which makes the business community happy because they don't like them.
Bill Reinsch: At the same time, Congressman Duffy from Wisconsin and I think 18 other, I believe Republican House members are going to introduce a bill that would give the President more tariff authority, more authority to raise tariffs if he found that reciprocity was lacking. This is what will become known I think as the Navarro Bill because-
Andrew Schwartz: So this is Sean Duffy, Republican of Wisconsin?
Bill Reinsch: Yes. So that goes in exactly the opposite direction.
Andrew Schwartz: Why is this called the Navarro Bill after Peter Navarro?
Bill Reinsch: Because he's been pushing it.
Andrew Schwartz: Okay.
Bill Reinsch: And he met with them and encouraged them to do it to give the President more authority. I think that if you want an opinion, fearless forecast here. Neither one is going to get across the finish line. The Democrats are not going to bring up a bill that gives Trump more authority so I think that one's Deal A.
Andrew Schwartz: It would seem so.
Bill Reinsch: The other, people have said kind things about it. Senator Grassley has said kind things about it but I think that Senator McConnell has been pretty clear over the last two years. He doesn't like to bring to the floor bills that the President's not going to sign. The President's not going to sign a bill that restricts his authority on tariffs. I think it's mostly an effort, I think it's an effort, a giant game in his effort to pressure him to A, not do it anymore particularly on cars because that's looming. Two weeks that report is due and to pressure him to get rid of the ones he's already done. But, I don't think you're going to see floor action on either one of them.
Scott Miller: I actually agree with your analysis and forecast of these bills. For me, this is like a 100-year-old argument that we keep having. Our friend, Gary Hufbauer, formerly of the Peterson Institute, points out to the, a Trading with the Enemy Act of 1915 as the first major Congressional delegation of power to the executive to restrict foreign commerce. And so, this debate's been going on. The constitution gives the power to regulate both interstate commerce and international commerce to the Congress. The Congress has delegated it a number of times for its own convenience. Sometimes when they've held the power, they've done really crazy things like Smoot-Hawley in the Tariff Act of 1930.
Bill Reinsch: Exactly.
Scott Miller: So, both the executive and the Congress have messed up from time to time about how to use this power but there's always been tension between the branches. It's why fast track or trade promotion authority is such a knockdown, drag out debate because it's all about delegation of authority. So, we're just playing this out as it has played out for 100 years in American trade politics. I think, certainly I don't think there's a way to prove majority for the Toomey bill and the reciprocity bill that Duffy or Navarro bill is a nice piece of communication because it sounds fair that if country A has a 10% tariff on our product, we got to have a 10% tariff on their products. That sounds good in basic communication. It's really bad as an economic principle because the more open your market is, the better it is for your own citizens and that gets lost in the notion of reciprocity.
Scott Miller: So, I think that one's certainly dead on arrival with the Democratic Congress and it's unlikely that there's two-thirds of both Houses for the Toomey bill. So, I think at this point, we're just creating some trees to recycle later into paper [crosstalk 00:24:34].
Bill Reinsch: There is a solution here, I have to say.
Andrew Schwartz: Do tell.
Bill Reinsch: Since neither Congress nor the administration is up to the task, they should let the Trade Guys make these decisions.
Andrew Schwartz: Yes. This is the way to go.
Bill Reinsch: You get much better policy that way.
Andrew Schwartz: This is the way to go. Well, you heard it here and I hope the administration is hearing it here as well.
Andrew Schwartz: Dear listeners, if you have a question for The Trade Guys, write us at email@example.com. That's firstname.lastname@example.org. We'll read some of your emails and have the Trade Guys react to it. We're also now on Spotify so you can find us there when you're listening to Rolling Stones or you're listening to Tom Petty or whatever you're listening to. Thank you Trade Guys.
Scott Miller: Thanks Andrew.
Andrew Schwartz: Thank you.
Andrew Schwartz: You've been listening to the Trade Guys, a CSIS podcast.