Compass Money: Two Steps Forward, One Step Back

Vice Premier Liu He and President Donald Trump signed an initial “phase one” trade agreement on January 15 in order to resolve the less contentious issues of the current U.S.-China trade dispute. Notably, when compared to traditional trade agreements, this agreement does not significantly liberalize trade between the two countries. Instead, the Chinese government has agreed to purchase more American products, a policy consistent with Chinese state-led development practices.

The Chinese government, through its state-owned enterprises (SOEs), will purchase $200 billion more of American products worst hit by the trade war: Boeing planes, coal, corn, and grain. In certain sectors, planned purchases far exceed current total American exports to the Chinese market. Agriculture Secretary Sonny Perdue even announced that farmers will not need a third year of government assistance to make up for trade war losses, thanks to $40 billion in new Chinese agriculture purchases. Less controversially, the deal also includes numerous intellectual property protections similar to those written into previous U.S.-China trade agreements. But, China has regularly abandoned such protections unilaterally. 

The Trump administration, for its part, agreed to eliminate certain planned and existing tariffs in key Chinese import sectors valued together at $160 billion. In addition, current tariffs will be lowered from 15 percent to 7.5 percent on another $112 billion worth of products. Essentially, the U.S. has agreed to pause new tariffs. But, the world has not escaped this trade war just yet. 

Officials across Europe and Latin America have noted that the Chinese purchase of American goods will come at the expense of their own commodities exports. Simply put, they see the risk of what economists call trade diversion. In this case, China’s government has chosen to purchase American goods, even if such products like Ukrainian soybeans and European Airbus passenger jets may be cheaper than their American alternatives. This is an artificial distortion of markets that results in a net loss for economic efficiency.

In contrast with this development, many economists have encouraged multilateralism and endorsed the creation of a united front of states against China’s ostensible mercantilism. Trump has focused instead on bilateral agreements, with repercussions like the latter.

While this agreement has reduced tensions, albeit unconventionally, the general global anxiety around trade will not fade anytime soon. Bringing China into compliance with U.S. trade demands while successfully defusing the trade war will take much creative American maneuvering, especially if the two countries’ shared trade partners continue to feel left out of agreements with spillover effects on their own economies.