The managed trade program has again failed.
While the “phase one” deal between President Donald Trump (ex-President) and Chinese President Xi Jinping in December 2019 may have ended the trade war, the agreement didn’t result in China purchasing more American products as promised by both leaders. In fact, during the two years covered by the deal, China imported fewer American goods than before the trade war began—meaning that the deal did not even succeed at patching up the damage caused by Trump’s bellicose trade policies.
Chad Bown is a senior fellow with the Peterson Institute for International Economics. He writes that the agreement did not reduce uncertainty which discourages business investment necessary to resume U.S. exports after two years of increasing tariffs and rhetoric regarding economic decoupling.
For two years, Bown has been tracking the promises made by both countries in what Trump called the “phase one” deal—there never was a phase two—as it has become increasingly apparent that those goals would not be met. Bown’s final analysis of the two year agreement concluded on December 31. He found that China had only purchased 57 percent of its promises, and not enough to achieve pre-trade-war levels.
China was required to purchase American-made products at least 200 billion more annually than in 2017. This is compared with pre-trade-war 2017 levels. Trump promised that the increased American imports would be distributed across many sectors, which will provide relief for farmers and manufacturers who were harmed from the new tariffs.
However, there was evidence that Trump didn’t intend to export his promises. This is more about Trump’s domestic campaign than any concession from China. It is important to note that the export promises were not realistic. This was more about Trump’s domestic re-election campaign than a serious concession from China. The Wall Street Journal noted shortly after the deal was made public, Trump was effectively asking for “an unprecedented jump in bilateral trade.” To meet its obligations, China would have to hike its purchases of U.S. goods by 60 percent over the pre–trade-war baseline. Unsurprisingly, this politically-motivated and fundamentally inept arrangement failed to deliver on its promises.
Trump’s first trade agreement was not about the dollar amounts. By demanding that China buy more goods from the U.S.—as if the two countries were actually large corporations Doing business with one another, not a collection of people and businesses who actually do trade with one another—Trump was actually making huge concessions to the Chinese regime.
The purchase commitments weaken the U.S.’s global economic leadership, and the U.S. may lose the upper hand on its economic model,” said Joshua Meltzer, and Neena Shanai (researchers at the Brookings Institution), in 2020. In fact, they violate long-held core principles held by the U.S., such as free market and rule of law. They also affirm and promote the Chinese state-controlled dirigiste model for economic growth.
The Trump administration’s demands that China fulfill in-effect quotas on U.S. merchandise purchases only reinforce the sway held by Beijing hardliners,” said Dan Griswold in December 2019. He is a senior research fellow at Mercatus Center. This think tank promotes free markets. It all for the promise that more exports may come about.
It is now clear that none of the benefits promised were realized. The costs keep rising. Auto manufacturers, for example, shifted supply chains to avoid the cost of tariffs and economic uncertainty created by the trade war—by relocating some American manufacturing jobs to China, which has become a large and growing market for auto sales. BMW, for example, shifted much of the production of its X3 sport-utility vehicle from Spartanburg, South Carolina, to China after reporting that tariffs had cut the company’s American profits by about $338 million in 2018. The higher costs imposed by the trade war caused Tesla to announce that it was “accelerating construction” of a new plant in Shanghai.
Overall, Bown estimates, exports to China would have been $26 billion higher in 2020 and $39 billion higher in 2021 if not for the impact of the trade war and subsequent trade deal. Other losses incurred in the trade war are not included, such as increased farm subsidies paid by American taxpayers or the increase in costs caused by tariffs.
Apart from positive developments regarding China’s treatment intellectual property and financial service, the most important thing about Trump’s “phase one” trade agreement is its expiration.
Bown concluded that “President Trump’s trade war, and the phase one agreement did not do much to alter China’s economic policiesmaking.” “Beijing appears determined to become more state-centered than market-oriented,” Bown concludes.