One day after Trump took a victory lap to celebrate "Phase 1" of the China trade non-deal that was "reached" almost two years after the US first launched tariffs on Chinese imports as part of an ever-escalating and bitter civilizational feud between the two superpowers...
... and which failed to resolve virtually any of the core outstanding issues but merely delayed implementation of next week's tariffs in exchange for more imports of US pork and soybeans (which China desperately needs anyway), one question emerged: Has it really all been worth it?
Consider what Trump touted as "the big win" of “Phase 1” in the trade talks:
In return for suspension of the October 15 US tariff increase (from 25% to 30% on $250bn of imports), China appears to have agreed to
- $40-50bn of purchases of US agriculture and agricultural policy changes,
- currency transparency, and
- opening market access for US financial services firms.
President Trump indicated some progress was made on technology transfer and intellectual property but, while some aspects might be addressed in Phase 1, this appears likely to be dealt with primarily in subsequent negotiations.
However, as Bloomberg notes, the surge in Chinese purchases of U.S. farm products that is the biggest victory for Trump in the agreement unveiled Friday is one that was first offered by Beijing more than two years ago. It will be accompanied by unspecified commitments - i.e., placeholders that will never be implemented - on intellectual property and currency and would, in theory, go some way to repairing the damage done to U.S. agriculture since tit-for-tat tariffs began more than 18 months ago.
In practice, they will remain just that: theoretical constructs that will be kicked back again and again as China will never concede to giving the US even implicit control over its currency, nor would it ever agree to an enforceable process that punishes it for reverse engineering US tech: after all, that is China's fundamental economic modus operandi.
What is more concerning is that when stripping away the agricultural aspect, the agreement is far smaller in scope than what the president himself once envisioned, or what was on the table when talks broke down in May. Furthermore, "it also leaves major questions hanging in the wind amid a broader relationship showing plenty of signs of souring -- ranging from the Chinese furor over an NBA executive’s backing for the growing protests in Hong Kong to the administration’s invocation for the first time this week of human rights to crack down on Chinese tech companies and visas for officials."
"This deal hardly resolves any of the major underlying sources of trade and economic frictions between the two countries," said Eswar Prasad, a former head of the IMF's China team now at Cornell University.
"It’s an escape hatch on tariffs, and a win for the farmers, but in terms of substantive benefits to the US economy and rebalancing the trade relationship, it’s a zero," one person briefed on the negotiations told the FT.
The Business Roundtable, which represent big companies, said it welcomed the “progress” and looked “forward to reviewing details of this agreement”. It called on “both governments to work toward making additional structural reforms in China and eliminating tariffs”.
Matt Priest, president of the Footwear Distributors and Retailers of America, an association of shoe companies, added: “The tariffs have already raised consumer costs and prevented shoe companies from growing. One step forward when we’ve taken three steps back on trade policy isn’t a real win for American shoe companies.”
The criticism continued from others, such as Bloomberg economists Tom Orlik and Yelena Shulyatyeva, who said that "there’s justified skepticism about whether even a mini-deal will get done. Officials said it will take three to five weeks to finalize the details. Past negotiations have broken down in less time than that."
Speaking to the FT, DoubleLine CEO Jeffrey Gundlach also warned that the deal did not appear to be very substantive. "The trade deal looks to be more cosmetic than real."
What the deal did achieve was a sharp bounce in stocks - one which Trump has become enamored with, believing it is the best proxy of his reelection chances. As Bloomberg aptly notes, "the package will calm markets and reduce fears of looming trade-driven recessions in the U.S. and global economies, even if Trump said Friday the two sides had yet to commit a deal to paper that he expects he and China’s Xi Jinping will sign in Chile a month from now."
Perhaps it was the realization that nothing was actually achieved beyond the purely superficial, that after the furious intraday "rumor" rally sparked an even more aggressive bout of "selling the news."
So what exactly was agreed? Here, too, there is some irony as the general framework of the deal unveiled Friday look very similar to ones negotiated by Treasury Secretary Steven Mnuchin and even Commerce Secretary Wilbur Ross that were rejected by Trump over the past two years, said Wendy Cutler, a longtime former U.S. trade negotiator who now heads the Asia Society Policy Institute.
“It looks more like a ‘light’ deal than a ‘substantial’ deal,” Cutler said, and remains at risk of being weakened further as negotiators put it down on paper in the weeks to come.
But the biggest criticism, one which even fervent Trump supporters as Laura Ingraham voiced, is that after months of escalation, Trump compromised this week and offered a tacit embrace of something he has resisted for months: a partial deal that might, in theory, yet grow into something more comprehensive... but in practice will take as many as three separate phases of negotiations, and in reality is dead on arrival.
“Doing it in sections and phases I think is, really, better,” Trump said Friday, flip-flopping after as recently as last week saying he would agree only to a big deal. In retrospect, what Trump really wanted, was to make sure the market doesn't sell all the news at once. After all the stock market has been jumping every day for the past two years on trade hope optimism: once a deal is in place, there is no more optimism to push stocks higher!
That change in strategy reflects a reality that many analysts have warned of from the beginning of Trump’s attack on China. While Trump has steadily increased pressure on China with his tariffs, the Chinese have always been reluctant to embrace the wholesale economic changes Trump has demanded.
"There is still a yawning gap that separates the two sides on core structural issues," said Prasad.
But, most importantly, the deal unveiled Friday does not include the "game changer" that Trump once promised would be a foundation of any deal with China: an enforcement mechanism to make sure that Beijing does not renege on its commitments. Trump could only make a vague promise that it would be worked out later.
Good luck with that.
Trump's panicked U-turn to get some deal out was quickly noticed by both republicans and democrats: "After so much has been sacrificed, Americans will settle for nothing less than a full, enforceable and fair deal with China,” said Chuck Grassley, the Iowa Republican who is the party’s leading voice on trade in the Senate. Across the aisle, Senate Minority Leader Chuck Schumer, expressed opposition to a mini deal that includes relief for Huawei, which he said would "show tremendous weakness."
Meanwhile, in the scramble to get a Friday afternoon soundbite, Trump was all too eager to set aside are many of the hardest issues confronting the two economies, including longstanding U.S. complaints about Chinese industrial policy and the government subsidies ranging from cheap electricity to low-interest loans that have fueled China’s economic rise.
So what hasn't changed?
Well, the "deal" will keep in place the U.S. tariffs on some $360 billion in imports that have disrupted global supply chains and more importantly leave, at least for the time being, a threat for more to come in December. Trump seemed to hint on Friday that he may be willing not to go ahead with those tariffs, which would hit popular consumer items like smartphones, laptops and toys and are quietly opposed by some of his own advisers, who fear they could deepen a slowdown in the U.S. economy going into the 2020 election.
“I’m skeptical that there is anything that could be objectively called a deal,” said Scott Kennedy, an expert on the U.S.-China economic relationship at the Center for Strategic and International Studies in Washington. “It appears that the U.S. was looking to find a way to avoid raising tariffs in the next couple months and reassure financial markets, and so it was willing to accept only an oral agreement on a narrow range of issues to take this step."
"Xi Jinping has to be quite satisfied with this outcome", Kennedy note, perhaps envisioning the tacit acceptance by Trump of Hong Kong's crackdown on pro-democracy protesters.
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Other pressing questions remained unanswered: what the Chinese agreed to on intellectual property - the issue central to the “Section 301” investigation used to justify Trump’s tariffs - was unclear. The main complaints contained in the original report centered on strategies ranging from cyberattacks to joint venture requirements that China uses to unfairly obtain U.S. technology.
It was also unclear what was agreed on the issue of currency manipulation, another longstanding U.S. complaint. On Friday, Mnuchin said only that there had been new commitments on transparency and that the U.S. was willing to review its August designation of China as a currency manipulator.
People close to the talks said the currency deal, first hashed out earlier this year, closely emulates the commitments to adhere to market-determined exchange rates contained in Trump’s renegotiated Nafta, though those allow a dispute resolution process that the China agreement does not yet contain. Critics have already dubbed even the new Nafta provisions toothless.
That said, for all the criticism, Trump's "deal" does have two major things to offer: A potential political victory for Trump and the sort of change of tone that many of his fellow world leaders have been hankering for.
“Today was a big win for the president,” said Stephen Vaughn, a partner at law firm King & Spalding who until earlier this year served as the right-hand man of Trump’s trade czar, Robert Lighthizer. “Once again, we see that the United States has enormous leverage in trade negotiations -- when we choose to use it."
"This won’t revolutionize the U.S.-China relationship or the terms of trade between us, but it shows that the two countries can work together on an important issue,” said Clete Willems, a former Trump adviser who now works at Akin Gump. "Learning to do so is critical to avoid a broad deterioration of all aspects of our relationship, which is not in anyone’s long term interest."
The biggest irony, of course, is that is precisely the wrong take: after all, if nothing changes, it is only a matter of time before China overtakes the US technologically, economically and militarily. The only thing that would prevent this from happening is for Trump to refuse to fold in the trade war, now in its second year, and watch as the Chinese economy shriveled and was set back by years if not decades. Alas, faced with the prospect of a political loss in just over a year, Trump had no choice but to fold in hopes of being reelected. Whether that strategy works, remains to be seen.