Away with the US-China trade deal | opinions

Two years ago, the US and China sought to end their escalating trade war by signing an agreement under which China pledged to import $200 billion in additional goods and services from the US in 2020 and 2021 Compared to 2017 to buy. This represented a total offtake commitment of $502.5 billion over two years. China ended up buying (for $288.8 billion) just 57% of the US exports it had pledged to buy, falling short of the additional $200 billion pledged.

Far from being a failure, this failure is more of a cause for celebration, because the only way China could fully implement the so-called Phase 1 deal was to use the same anti-market tools that American companies are using in China had long hampered their efforts to do business in China.

Former US President Donald Trump launched the trade war in 2018 to force China to stop stealing intellectual property from American companies, subsidizing “strategic” sectors and more generally using opaque regulatory measures to the detriment of American companies. After several tariff increases on both sides had affected trade between the USA and China, the two countries concluded an agreement in January 2020 that provides for the China’s aforementioned purchase obligations.

opaque regulation

Although the deal specified the quantities of US products China would buy, it made no provision for lowering China’s import tariffs, nor did it oblige China to make legal and regulatory changes to the issues that prompted Trump to issue the deal in the first place to start a trade war. Instead, the intention was to address these issues in later rounds of negotiations, presumably at a time when China had demonstrated its commitment to regulatory reform by fulfilling off-take commitments.

However, since China had made no commitment to lower tariffs or address structural issues, it was only able to meet its commitments from the first phase of the deal by resorting again to opaque regulatory measures – this time, however, to favor US exporters and theirs disadvantage competitors. For example, the Chinese authorities could have instructed state-owned companies to buy American goods, or they could have made it clear to private importers that they would benefit from doing so because they were supporting “national policies.” Chinese officials could also have instructed customs and health inspectors to favor US goods over products from other countries.

While these measures would have increased American exports to China in the short term and benefited American companies, the long-term costs would have been enormous. Due to the associated increased dependence of China on anti-market mechanisms to support its political and economic goals, they would have pushed a leveling of competitive conditions in the Chinese market even further into the future. More importantly, while America benefits from economic coercion, it remains economic coercion, and evokes a dark period in Chinese history when the British used similar tactics of massive pressure to sell more opium to China.

Agreement strengthens state control

Even if tightening government control was merely a viable short-term tactic as part of a long-term strategy, it would hardly suggest that Chinese policymakers would place greater emphasis on eliminating government controls in the future. It’s like telling an alcoholic that the first step to abstinence is to drink more.

Not surprisingly, China favors an agreement that strengthens state control and eliminates US pressure for structural reforms for the time being. US companies may think they have benefited from preferential treatment from China under the off-take agreement, which expires at the end of 2021, but they will inevitably lose out if government controls are used against them again.

Japan implemented a number of long-overdue structural reforms in the late 1980s and early 1990s, partly under pressure from US trade negotiators. However, the Phase 1 deal makes it unlikely that the Chinese government will bow to US pressure and implement trade-related structural reforms. The losers in this development will be Chinese consumers and private companies.

America’s consumers foot the bill

So we should be glad that this flawed trade deal was never fully implemented. But how should it continue?

There is ample evidence that American consumers and businesses that rely on China for inputs are among the top losers from higher US tariffs on Chinese imports. Four separate studies have shown that Americans bore almost the entire cost of these tariffs in higher prices. However, President Joe Biden’s decision to leave Trump’s tariffs untouched raises the question of whether US trade policy even cares about the well-being of American consumers, or whether it is instead primarily guided by the need to boost corporate profits .

The Biden government should make urgent efforts to balance this trade imbalance with China through reciprocal tariff reductions. With US inflation at a four-decade high, ending this damaging trade war as soon as possible should be a top priority.

Copyright: Project Syndicate.

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