President Donald Trump is touting victory with his “phase one” trade deal with China. If this is phase one, America should unsubscribe before we get charged for the next installment.
Americans have tightened their belts through Trump’s trade wars and are eager to know what this first phase agreement portends. Unfortunately, it looks like a mix of backwards-looking policies and measures likely to worsen America’s structural economic imbalances with China.
The pledge to protect U.S. businesses against intellectual property theft and forced transfer of technology to Chinese firms will only make things worse by helping more American industry take flight to China.
Since 2018, sharp, global economic disruptions spawned by escalating tit-for-tat tariffs unfolded across the U.S. economy.
Of course consumers and small businesses faced higher prices as a result of tariffs on $550 billion of Chinese imports. But even industries Trump intended to bolster are taking it on the chin. Shares of U.S. Steel X, +0.52% and aluminum giant Alcoa AA, -10.10% have crashed and employment in these industries is tanking as metals producers shutter more factories.
Most farmers got little
Trump’s $16 billion bailout funds for farmers who lost access to China’s growing markets will not repair the collateral economic damage foisted upon innocent bystanders in American agriculture. The lion’s share of this purse went to large, corporate farms; 80% percent of farmers saw less than $5,000 on average in benefits.
Layoffs and bankruptcies are endemic in agricultural communities across all 50 states, from those in Maine built around lobster, to Iowa soybean, Georgia cotton, North Carolina tobacco, and so many other American farmers. About the only people profiting are the legions of business lobbyists and trade lawyers swarming the Department of Commerce and U.S. Trade Representative offices.
Headlining-grabbing pledges of $200 billion in exports to China over the next two years are little more than smoke and mirrors. The deal that makes little ground and keeps trade conflict on simmer. Bulk purchase agreements may violate WTO rules — not that Trump or his U.S. Trade Representative (USTR) seem to mind — but more importantly are hollow achievements.
This is stuff China already wants to buy from us. China wants liquid natural gas to fuel its growth and decarbonization, though exporting it will make energy prices higher for manufacturers and consumers in the United States. And China wants U.S. agricultural goods to feed its more than a billion people and to keep consumer prices in check, given their swine flu epidemic.
The biggest policy commitments in phase one look backwards to an outdated era of China’s economic development. For years, the United States has struggled to find a policy that could counter China’s exchange-rate management for competitive trade advantage. But it has been years since exchange-rate manipulation has been a serious issue.
In fact, through most of the 2000s, China engineered a gradual appreciation of its exchange rate against the dollar BUXX, +0.08% , meaning overall more favorable terms of trade for American producers.
In Trump’s first year as president, preceding the beginning of tariffs in 2018, the Chinese USDCNH, -0.2002% appreciated nearly 10%. Even the most enforceable currency measures, though welcome, are not going to rebalance U.S.-China trade.
Also for years, the United States has pushed China to open up its financial system — home to some of the world’s largest banks and financial markets — to American investment.
We started down this road some time ago. In the mid-2000s, foreign financial firms bought heavily into minority stakes in leading Chinese banks; most divested several years later with handsome profits as financial pressures of the Great Recession mounted on their balance sheets.
Since 2014, foreign financial firms have been free to deliver a growing range of services through offices in the Shanghai and other special economic zones. But they never really dove back into China’s market with gusto.
Unlike other developing countries, China does not face problems of supply of capital for investment. Rather, China’s financial problems lie in choosing whether to deploy capital in productive ways.
We may never know what Trump traded for these pyrrhic concessions from China. Read the full text of the agreement.
More outsourcing to China
Overall manufacturing job growth is flat-lining under Trump’s trade, tax, and deregulatory policies. The pledge to protect U.S. businesses against intellectual property theft and forced transfer of technology to Chinese firms — the basis of America’s Section 301 tariffs in 2018 — will only make things worse by helping more American industry take flight to China.
A more secure environment for corporate technological assets makes China more enticing not just as a location for high-tech manufacturing, but as a hub for advanced technology research and development in all key sectors — a promise made only more alluring by extensive social investments in education, science, and infrastructure lacking in the United States.
This is not a theoretical concern. In an early appeasement to Trump in April 2018, China unilaterally liberalized foreign direct investment in electric-vehicle manufacturing, scrapping requirements that foreigners form joint ventures with local partners.
More American industrialists will follow Elon Musk to China, now that the trade deal eases restrictions on U.S. companies’ direct investments in China.
By May, Tesla TSLA, -2.81% had registered a corporate subsidiary in Shanghai; next December it broke ground on a multi-billion dollar “gigafactory;” 12 months after that, Tesla began delivering new made-in-China cars to the domestic Chinese market.
Trump should be more careful what he wishes for.
We can hope at best that signing an agreement may temporarily alleviate tensions and halt the downward spiral of bilateral relations. This is not a solution to the structural challenges posed by a rapidly developing China and a stagnating America, but maybe it will give Americans some breathing room to shop around for a better deal — or a better deal maker.
Adam S. Hersh, Ph.D. is a research associate at the Political Economy Research Institute at the University of Massachusetts, Amherst. Previously Hersh was chief economist at the Congressional Joint Economic Committee, and senior economist at the Roosevelt Institute and the Center for American Progress.