Saturday, February 22, 2020

Analysts see little gain in Trump's trade war

Jan 16. 2020
President Donald Trump signs a trade agreement with Chinese Vice Premier Liu He at the White House on Wednesday, Jan. 15, 2020. MUST CREDIT: Washington Post photo by Jabin Botsford
President Donald Trump signs a trade agreement with Chinese Vice Premier Liu He at the White House on Wednesday, Jan. 15, 2020. MUST CREDIT: Washington Post photo by Jabin Botsford
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By TRADE-ANALYSIS/The Washington Post · Heather Long 

One of the most basic questions as President Donald Trump and China's Vice Premier Liu He formally sign the "phase one" trade agreement is whether Trump's trade war was worth it.

The White House released a 94-page deal on Wednesday, and there are some big gains for the United States: China has agreed to buy about $200 billion more of U.S. goods over the next two years, and U.S. companies will get more access to the Chinese market and a bit more intellectual property protection. In return, the U.S. has agreed to hold off on more tariffs on China and to reduce tariffs on some items, notably clothing.

Looking strictly at the numbers, the deal doesn't look so great. China's additional purchases make up for a fraction of the trade war's hit to the economy over the past two years, analysts say. And many critics have pointed out that China was offering to buy more agricultural and energy back in spring 2018 - before Trump escalated the trade war substantially.

But where this agreement has the potential to be game-changing is in reshaping trade relations with China. Trump has shifted the dialogue about China. There is now a wide consensus in the United States to challenge China on its worst actions. After this agreement, U.S. firms in China are no longer supposed to be forced to hand their technology over to Chinese companies, a longstanding problem. The tariffs have also caused what some are dubbing a "partial divorce" between the U.S. and China, with supply chains once rooted in China now moving to other nations, especially Vietnam and Taiwan, making the U.S. slightly less reliant on China for daily goods.

"Today we take a momentous step with China, one that has never been taken before China," Trump said Wednesday before signing the deal in a lengthy ceremony. "We mark a sea change in international trade."

Yet, leading up to this point, the trade war inflicted a lot of pain, pretty much everyone agrees. As Trump hiked tariffs on China, U.S. economic growth slowed, business investment froze, and companies didn't hire as many people. Across the nation, a lot of farmers went bankrupt and the manufacturing and freight transportation sectors tumbled into a recession. Trump's actions amounted to one of the largest tax increases in years.

Oxford Economics and Moody's Analytics calculate that the U.S.-China trade war shaved 0.3% off growth - the equivalent of $65 billion - last year. And that is likely to grow to $85 billion in 2020, according to Gregory Daco of Oxford Economics, since this deal does not end the trade war. Many of the tariffs will remain in place, covering about two-thirds of Chinese imports, meaning there will be an ongoing drag on the economy this year.

Given all of this, economists say this trade conflict has been a net loss to the economy, albeit a modest one, in the short term.

Even Trump and his team ultimately acknowledged that the U.S. did suffer from the trade war. But they claimed that the benefits to the United States from a deal would outweigh the costs and that the tariffs were hurting China more.

Trump points out that Presidents George W. Bush and Barack Obama didn't get this far with the Chinese and that there's the prospect of new punishments if China does not do what it promised, in the form of more tariffs. Also, the White House says it will launch "phase two" negotiations to address deeper structural problems in the Chinese economy that hurt competition, but there's a lot of skepticism about whether another pact can be secured.

The trade deal has loomed large on Wall Street over the past two years. And the markets applauded the deal, sending stocks soaring to new highs, mainly because of relief over a trade truce with China. Tariffs are unlikely to go higher and could even come down after the election, Trump hinted.

"I am much more positive and optimistic than you might think," Blackstone chief executive Stephen Schwarzman said on Fox Business. "I think the Chinese will honor this deal."

Critics of the deal, though, point out that it is far more modest than what Trump promised, that China has a history of not following through and that there is little in the deal that alters President Xi Jinping's ambitious "Made in China 2025" plans. For example, one of the biggest problems is how much the Chinese government subsidizes certain industries. The deal doesn't address that.

China promised to purchase "at least" $200 billion more of American products ― more meat, soybeans, energy, manufactured goods and services. But in remarks at the White House, China's vice premier went out of his way to say that Chinese firms will buy more "based on market conditions," which already suggests some hesitancy to do exactly what was written down.

And this $200 billion promise of Chinese purchases doesn't necessarily mean new sales that wouldn't have happened. Many experts say U.S. farmers, manufacturers and others will simply sell to China what they would have sold to other nations, significantly lessening the economic gains.

"Let's not forget that the $200 billion is a promise that will likely come from trade diversion rather than trade creation," Daco said in an email.

Some industries make out well in the agreement. Financial services and insurance companies have long wanted to get access to China's market without having to partner with a local bank. JPMorgan Chase is already making moves to enter China, a huge potential market. And China has agreed to lift restrictions on American dairy products, infant formula and beef, enabling U.S. farmers to sell more in China.

On paper, China has also agreed to increase its punishments for intellectual property theft, including larger fines and even imprisonment to deter stealing. And it said it would allow witness testimony in civil cases. China also agreed to "market-based" exchange rates. China's government used to devalue its currency regularly to gain more trade advantage, though that has not been a problem recently.

Trump's trade war with China has been going on for nearly two years, causing U.S. companies to lose their foothold in China as firms from Europe, Canada, Brazil and other nations swoop in to take advantage. And the trade war continues as the truce leaves in place tariffs on $360 billion worth of Chinese imports.

Whether this deal ultimately pays off depends on whether U.S. firms and farmers really do get more access to China. That remains to be seen.

 

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