The Good, the Bad, and the Ugly: Three Takeaways From the Would-Be U.S.-China Trade Deal

Not for the first time, China and the United States seem to have the makings of a deal that could temper tensions in their trade fight, though it’s still unclear exactly what’s in the deal or when it will be signed, sealed, and delivered.

U.S. President Donald Trump on Friday tweeted that the two countries have reached a “very large” deal which by all accounts is similar to all the other stillborn deals they’ve almost reached over the past year and a half—some reductions in U.S. and Chinese tariffs (and the cancellation of the last big tranche set to go live on Sunday) in exchange for more Chinese purchases of U.S. goods. The Office of the U.S. Trade Representative didn’t provide many details of the preliminary accord but said it included “meaningful, fully-enforceable structural changes.”

Chinese officials held a press conference confirming a general agreement has been reached but didn’t confirm any of Trump’s wilder claims, such as the notion that China had agreed to far-reaching “structural” changes in its economy, which would include things like an end to the use of industrial subsidies or China’s industrial development policy—which has been a red line throughout the trade discussions.

Here are three big takeaways from what we know so far about the latest mini-deal.

The Good: No New Tariffs (for Now)

With big U.S. tariffs due to go into effect Sunday on almost $160 billion worth of Chinese goods, the preliminary agreement at least removes one big threat hanging over the U.S. and Chinese economies. The last batch of tariffs, unlike earlier rounds, was squarely focused on consumer goods and would have had an even bigger impact than earlier tariffs, which mostly affected U.S. manufacturers. Initial reports that both countries had reached an agreement sent stock markets up to record levels in New York, momentum that continued early Friday.

As part of the agreement, there’s even some relief on existing tariffs, with the United States poised to halve the tariffs that it imposed over the summer, while leaving the first batch intact. That will offer a bit of help to those U.S. manufacturers that rely on Chinese intermediate goods to make finished products, as well as taking some pressure off Chinese exports, which have been declining for months.

In exchange for some tariff relief, the United States will get some concessions from China: A pledge to buy more U.S. goods, especially agricultural products (which China has talked about) but perhaps also oil and natural gas, according to Trump, as well as fresh Chinese promises to try and crack down on intellectual property violations.

“A cease-fire is very significant,” said Mary Lovely of the Peterson Institute for International Economics, especially the cancellation of the planned December tariffs. “We were on the brink, and trade negotiators pulled us back.”

The Bad: No Reckoning With the Original Cause of the Trade War

The preliminary agreement the two countries have reached isn’t even a real trade deal but essentially a big purchase agreement with a few other potential sweeteners thrown on top. And the Chinese agreement to buy more U.S. products carries its own question mark: Widespread reports that China could be poised to buy $50 billion worth of farm goods next year has analysts shaking their heads. That’s likely more than the Chinese market has demand for, and it’s not clear U.S farmers could even produce that much (the record level of U.S. agricultural exports to China was less than $30 billion.)

In other words, the likeliest outcome after two years of expensive tariffs, bankrupt farmers, and nervous markets is that the United States might just be able to get back to where it was in the last year of the Obama administration, when China was the largest U.S. agricultural export market and gobbled up $21.4 billion worth of soy, corn, and pork.

“I think in the long sweep of things, this did not play out too well for the United States,” Lovely said.

But the whole trade fight with China began after a U.S. trade investigation, known as a Section 301 investigation, that alleged Beijing was systematically engaging in uncompetitive practices, especially state-sponsored theft of U.S. intellectual property and Chinese state support for government-owned firms. It’s not clear that the new agreement does much to concretely address any of that—and it pretty much forecloses the prospect of any follow-up deal doing so, either.

“It won’t solve any of the problems in the U.S.-China economic relationship—agriculture and crude oil sales are not the problem,” said Derek Scissors, a China expert at the American Enterprise Institute.

For months, administration officials have talked up a limited “phase one” deal to buy some relief for hard-hit farmers, before seeking to tackle the contentious, structural issues in a second accord. But the tariff rollback and initial Chinese concessions make that unlikely, even though Trump claimed that both sides would start “phase two” talks immediately.

“There’s not going to be a phase two deal,” Scissors said. “The Chinese have no incentive to make a phase two deal after this one.”

That’s not to say that forcing China to make structural changes to its entire economic model—something it has refused to even contemplate during this trade fight—is impossible. It would just require a lot more sustained pressure for a longer time than Trump is willing to apply, Scissors said.

“The fundamental problem here is, this is going to take six years—and we’ve had serious tariffs on China for seven or eight months. You don’t win a trade conflict with China in seven months, but Trump just doesn’t have the patience,” he said.

The Ugly: This Isn’t the China Deal Trump Campaigned On

Trump used China as a punching bag during the presidential campaign, railed against its unfair trade practices (sometimes correctly), and hit nearly all of China’s exports to the United States with big tariffs. His whole argument was that the massive U.S. trade deficit with China was bad for the United States, that the Chinese government was stealing U.S. technology, and that he alone could bring back manufacturing jobs to the United States. This mini-agreement, or what little has been made public, does none of that.

“He promised manufacturing jobs and is not getting any of that in the trade deal,” Scissors said. The U.S trade deficit with China–Trump’s big concern–has only grown on his watch. It’s not clear yet whether the mini deal will exacerbate that deficit, or maybe start to trim it. But what has come out so far “does not fulfill at all the president’s campaign promises,” Scissors said.

And those broken promises—even more than Trump’s failures to build the wall at the southern border, or provide health care, or fix the opioid crisis, or bring peace to the Middle East, or force Iran to renegotiate the nuclear deal—could present a political liability in next year’s election. Most Democrats in the field have their own protectionist views on trade and their own urge to get tough on China’s economic abuses.

“A weak phase one deal can be hung around his head, and contrasted to what he promised,” Scissors said—unless the mini-deal becomes too big an anchor, in which case he could just tear the whole thing up and redouble efforts to punish China. Which would start the trade wars all over again.

Read More

Trade War Pause Leaves Few Happy

Mini-deal between the United States and China brings relief to farmers but offers no long-term solutions.

Report |

Keith Johnson, James Palmer

Trade War Pause Leaves Few Happy

Mini-deal between the United States and China brings relief to farmers but offers no long-term solutions.

Report |

Keith Johnson, James Palmer

China Is Rewriting the Law of the Sea

Washington missed the boat to shape the global maritime order. Beijing is stepping in.

Review |

Peter A. Dutton

This story was updated on Dec. 13, 2019 to reflect the latest ‘details’ on U.S. tariff rollbacks.