U.S. and China Sign a Deal, Inequality Eludes Measurement, Canada Leads with Fiscal Policy
Armistices and ceasefires do not necessarily mark the end of a war. On many occasions, they establish only a pause in hostilities for an agreed timeframe or within a limited area while an attempt is made to negotiate a lasting peace. This is perhaps the best way to summarize last week’s “Phase One” agreement between the U.S. and China.
After two years of rising tariffs and receding goodwill, the signing ceremony led many observers to breathe a sigh of relief. Trade uncertainty is a major issue facing the global economy, and de-escalation is a welcome change of tone. World equity markets cheered.
The signed agreement includes some noteworthy features. China has agreed to purchase $200 billion (based on 2017 levels) in additional U.S. goods and services over the next two years, including $32 billion in agricultural products and $52 billion in energy goods. This was particularly good news for American farmers, and for the American taxpayers who provided offsetting support for lost crop sales to China.
China has committed, at least on paper, to curb some business practices that caused friction with U.S. investors, including theft of intellectual property, counterfeiting and the forced transfer of technology to domestic competitors. U.S. corporations doing business in China will gain a more level playing field, with greater access to the Chinese financial services market. (Limits on foreign equity stakes and discriminatory regulatory requirements have constrained growth for American firms in China.) China has also pledged to be more transparent in currency markets, in line with earlier commitments.
Phase One is a small step toward conflict resolution. Both sides can claim victory. But the deal is limited and fragile, without adequate checks and balances to prevent future flare-ups. It fails to substantially bridge the gap between the two nations on key contentious issues. We have concerns in the following areas:
Consumers and businesses in both countries will continue to pay hefty tariffs. Phase One includes very little relief from taxes on trade. The U.S. will maintain 25% tariffs on about $250 billion worth of Chinese imports of intermediate and durable goods, and will levy a reduced rate of 7.5% on another $110 billion of consumer goods. China will keep retaliatory duties of 5% to 25% on about $110 billion worth of American goods.
“The terms of Phase One leave a lot open to interpretation.”
- China’s purchase commitments are conditional and ambitious. China has said its incremental purchases will depend on “commercial considerations” and “market conditions,” suggesting the U.S. will have to ensure supply at competitive prices. And the targeted purchase levels will be difficult to achieve. To fulfill its commitments, China would have to double its purchases from the U.S. from $186 billion in 2017 to $386 billion by 2021. This translates to a growth of 21% on an annualized basis over 2017-2021, compared to the 4% growth rate seen over 2013-2017. While the additional commerce will be positive for American farmers and manufacturers, reaching these targets will be difficult.
- The accord lacks clarity on enforcement and leaves many points open to interpretation. It includes an ad hoc dispute resolution system. While conventional trade deals refer disputes to a neutral third party such as the World Trade Organization, Phase One instead commits both sides to create a “Bilateral Evaluation and Dispute Resolution Office” to address complaints. If the two parties cannot resolve a dispute, either side can impose tariffs or leave the pact. Failure to resolve disputes could result in scuttling Phase One and reverting to a trade war scenario.
- Some of the reforms to which China has agreed as part of the trade deal were initiated even before the trade war began. In 2017, China had already started allowing foreign firms increased access to its financial sector. Under the rules announced in late 2017, financial corporations were already allowed to own majority stakes (up to 51%) in Chinese financial firms. Phase One only helps remove that 51% limit this year. China has also tightened intellectual property rules and enforcement in recent years.
- The agreement fails to address key non-tariff barriers, including China’s state subsidies and the battle over strategic telecommunications hardware and software.