Trump’s China Trade Deal Handwave

Yves here. No one is terribly impressed by the “Phase 1” sort of ceasefire with China. First a high level take from Barkley Rosser in The US-China Nothing Burger Trade Deal:

The US did not raise tariffs as planned, but tariff still remain on two thirds of the sectors that had them, although some were halved. But numerous US sectors see no change at all and are now viewing the situation as not likely to improve, with them suffering losses of business likely to return. Among those are chemicals, apparel retailers, and auto parts. In these and other sectors there is not much reduction of uncertainty regarding US-China trade, so not likely much increase in investment.

The main items in it besides no worsening of tariffs, China has made promises not to pressure US firms to turn over technology and also to increase imports from the US by $200 billion over the next two years, especially in energy and agriculture. So maybe US soybean farmers will no longer need the bailouts of billions of $ Trump has been providing to them. However, such promises have been made in the past.

As it is, I am watching commentators on Bloomberg, and about the most any of them are willing to say is that this “puts a floor” on the “deterioration” of US-China trade relations. That is far from some dramatic breakthrough, and most of the tariffs put on as part of the US-China trade war remain in place.

Notice the “China made promises” part. It’s hard to see Chinese practices changing much; the most I’d expect is an end to the most egregious practices, and then only vis-a-vis US companies that might be able to get a hearing back home.

SafeHaven has more detail but reaches the same conclusion:

The siging of the Phase 1 deal will certainly put at least a temporary floor in the increasingly fractious relationship between the U.S. and China and buying some time is what both sides want. From Trump’s perspective, de-escalating the trade war with China, at least to the extent that it is no longer perceived to be meaningfully damaging U.S. economic growth is good for his popularity ratings ahead of this year’s Presidential Election….

For China, the signing of the Phase 1 deal appears to have given the leadership a renewed sense of optimism about the 2020 growth outlook…Given that the leadership will not be able to blame the trade war for reduced economic activity, then, the likelihood increases of Beijing seeking to hit its longstanding target of doubling 2010 GDP level by 2020, he [Rory Green, Asia economist for TS Lombard] added….

Looking further ahead, though, depending on the result of this year’s U.S. election, this rapprochement between the two countries is likely to come under renewed strain, to say the least. Central to this will be how precisely the U.S. proceeds in handling the continued growth in China’s technological capabilities and global reach. Until the U.S. backed down late last year, China was considering “a range of ante-upping options against the U.S. and its allies in Asia-Pacific”, a Moscow-based senior political source in the Russian Presidential Administration told OilPrice.com earlier this week. “The plans were not used when it [the U.S.] continued with the licence for Huawei [on 18 November],” he added…

At the same time, the U.S. had added another 46 Huawei affiliates to the ‘Entity List’ (to a total of more than 100 Huawei entities) that comprises companies effectively banned from doing businesses with U.S. firms. “Such is the centrality of U.S. semiconductor firms in manufacturing chains that a ban by Washington could effectively cut off global semiconductor supplies,” said TS Lombard’s Green. “The result would be a modern day equivalent to the Japan oil embargo that was imposed by the U.S. [on August 1941, in response to Japanese actions in then-Indochina] and that was a key prompt for the attack on Pearl Harbour,” he said. “For hawks in the Chinese government, U.S. actions against Huawei and its related companies would be very near to a declaration of war,” he added.

The major risk before the U.S. election, on the other hand, according to Green, would be if Trump feels that he needs a boost going into the polls and thought that re-opening the trade war would be a vote winner….“Phase 1 targets on technology transfer and IP protection are nebulous, and Washington will be able to find fault here if it wishes,” he concluded.

BBC has an interesting take on winners and losers. Trump and Xi are winners, and interestingly, Taiwan/Vietnam/Mexico. The last three benefitted from $165 billion in redirected trade, only some of which will be reversed as a result of this agreements.

The losers:

Loser: American companies and consumers

The new deal halves tariff rates on $120bn worth of goods, but most of the higher duties – which affect another $360bn of Chinese goods and more than $100bn worth of US exports – remain in place. And that’s bad news for the American public.

Economists have found that the costs – more than $40bn so far – are being borne entirely by US companies and consumers. And that figure does not even try to measure lost business due to retaliation.

Overall, the Congressional Budget Office estimates that tariff-related uncertainty and costs have shaved 0.3% off of US economic growth, while reducing household income by an average of $580 since 2018…

Loser: Farmers and manufacturers

The new deal commits China to boost purchases in manufacturing, services, agriculture and energy from 2017 levels by $200bn over two years.

Mr Trump has said that could include as $50bn worth of agricultural goods a year.

But the official figures are lower, analysts are sceptical those are attainable and China has said the purchases will depend on market demand. So far, the primary effect on business has been pain.

Farmers, who have been targeted by China’s tariffs, have seen bankruptcies soar, prompting a $28bn federal bailout.

Among manufacturers, the Federal Reserve has found employment losses, stemming from the higher import costs and China’s retaliation.

Over the long-term, American firms may reroute supply chains away from China to avoid the tariffs – but that’s an expensive prospect.

Yves here. I’m not entirely on board with the glossing over who bears the tariff costs or pinning it all on Americans. US profit share is at record levels, so while technically, companies would be hurt if they maintained prices and ate the tariff cost, the question is by how much. Similarly, the assumption is that US customers would pay the higher tariffs, as opposed to, say, shifting purchases to products less exposed. In other words, it’s not clear how much the analysis allows for corporate customers and end buyers being able to substitute.

Finally, the best for last from the China Law Blog, which stunningly says the deal has been announced as being agreed with no final English text! This would seem to confirm the notion that the main point was optics, not substance. From The US-China “Phase One” Deal — No Text, No Translation. What, Me Worry?:

The United States and China are scheduled to have a grand signing ceremony on January 15 for the “Phase One” deal that is supposed to solve the U.S.-China trade war. Though more than 200 guests have been invited to attend the ceremony, no one knows exactly what they will be signing because the text of the “Phase One” deal has not yet been released…

Treasury Secretary Steve Mnuchin has dismissed “rumors” that China’s commitments in the deal had been changed in translation. Of course, since no one has seen either the English or Chinese versions of any drafts of the deal, it is impossible to do a side-by-side comparison to see if the English and Chinese versions are consistent or what, if any, changes were made from prior drafts, also undisclosed. There is though a very significant possibility the Chinese version will not be entirely consistent with the U.S. English version and the Chinese will think they have agreed to something different from what President Trump and his team believe they have agreed to.

The Trump Administration’s cavalier attitude that the Chinese translation of what is reported to be an 86-page English version of the deal is just a minor technical matter is a bit shocking. In general, if treaties and other international agreements are authenticated in two or more languages, the text is equally authoritative in each language, unless specifically provided that one language will prevail over the other. It seems likely that the Chinese side will insist that the Chinese language version be considered equally authoritative as the English version.

The rest of the post is a bit too obviously sale-y, pointing out the many tricks Chinese companies play with dual language agreements. On the one hand, the risk the Trump Administration will be lax is real. For instance, the initial presentation of the tax reform bill was embarrassingly thin; experts had never seen anything like it. But the tax lobby had pet language ready to go, so it wasn’t hard to slap something together from that.

The flip side is key parts of this deal appear to have been left vague by design so Trump could assert non-complaince. And since when has Trump been big on living up to his word?