Little new in US-China trade accord

Dark clouds still hang over global economy

President Donald Trump is portraying the US-China agreement in principle on the phase one trade deal as ‘amazing’ and ‘historic’. Some call it a big win for the president and farmers. But, absent details to the contrary, the hype does not match reality.

On its face, the deal appears mainly to provide for modest US tariff reductions on Chinese goods, in exchange for increased Chinese purchases of US goods, in particular agricultural products.

According to the president, China will buy $50bn in US agricultural products – much of which China would have bought globally anyway. Analysts question the feasibility of that figure; China has not confirmed it. Farmers may be happy, but they lost substantial sales already, many face dire straits, and handouts cost the Treasury $28bn. The US Trade Representative also states China will increase purchases of US goods and services by $200bn over the next two years, but the details are unclear.

Other chapters appear to discuss better enforcement of intellectual property rights, an end to China forcing or pressuring foreign firms to transfer technology, openings to foreign financial services providers, and dispute resolution procedures. Another chapter on foreign exchange issues relating to the dollar and renminbi does not appear to contain much new material, although there is some sensible and helpful language. If including the currency chapter allows the Treasury to rescind its mistaken designation of China for currency manipulation, that would be highly welcome.

Many market participants portray the deal as lifting a cloud over global economic uncertainty. Indeed, some estimates of the costs of tariffs and uncertainty reached around 1% of global GDP. But this is only a partial deal, global chains are disrupted, US presidential elections loom, and US-China competition is here to stay. Plus, one never knows what tomorrow’s tweet will bring. The cloud has hardly lifted.

In assessing the deal, it is worth looking at the broader context. Trump’s administration was justified in raising deep concerns about China’s policies of forced technology transfers, violations of intellectual property rights, heavy subsidisation of industry, and statism.

The entire world was on board with these complaints. Yet, by abandoning the Trans-Pacific Partnership and threatening Europe and North America with trade actions, the administration was left alone to tackle Chinese practices. This reduced its leverage, seemingly allowing China to minimise concessions and reinforcing its statism.

Protectionism is sharply ascendant. In the wake of the 2008 financial crisis, G20 leaders committed to refrain from new protectionist measures. This ‘refrain’ largely held for many years. But it is now abandoned and surging protectionism harms consumers and businesses.

All reports suggest that the bigger structural issues the president raised concerning heavy-handed Chinese economic statism remain, whatever the provisions in the text. Further, analysts agree China will not address them until after the US elections, if even then.

The cause of multilateralism has been set back. That may not concern the White House. But it will deeply harm the US’s global role and the world’s perception of the US. It may set back incentives for China to integrate more closely into the world economy.

On its face, pending the details, there is little that should cause one to rejoice, other than the cooling of temperatures.

Turning to the currency chapter, the deal will reportedly include commitments on increased transparency on reserves and intervention. That is to be welcomed. But China has not been intervening in currency markets to any appreciable extent for years, and then to support the renminbi.

It will include commitments to refrain from competitive devaluations and targeting exchange rates. That is standard G20 language that China agreed to as far back as 2013.

It will probably provide for enhanced consultations, and perhaps even a dispute process if transparency commitments are not met. But US and Chinese financial authorities have long consulted frequently and closely.

The US may point to the need for exchange rate stability. Presumably, the US does not want the renminbi to go down v. the dollar, but would not be averse to renminbi appreciation. Even though promoting flexible exchange rates is a hallmark of US foreign exchange policy, these days it seems the People’s Bank of China is a bigger proponent of currency flexibility.

Mark Sobel is US Chairman of OMFIF.

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