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Lesh: China trade deal: the good, the bad and the ugly

By   /   Friday, January 17th, 2020  /   Comments Off on Lesh: China trade deal: the good, the bad and the ugly

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By Kirk Lesh

President Donald Trump signed “phase one” of the trade deal with China.

As usual, it took a lot of time, tweets and market fluctuations to finalize. Considering that this deal is called “phase one,” it is reasonable to expect future deals. So, what is in “phase one,” and what can we expect in the future?

A Dec. 13 Reuter’s article said the United States has agreed to cut the tariff rate imposed earlier this year in half, while China has agreed to cancel retaliatory tariffs. China agreed to increase its purchases of U.S. goods by at least $200 billion and increase agricultural purchases by $32 billion over two years. China also agreed to increase protections for intellectual property. Finally, China agreed to refrain from competitive currency devaluations.

So what is the good? First, notice that China made the most concessions. For cutting some tariff rates, the U.S. did quite well. Please note that not all tariffs will be reduced. China will continue to pay tariffs on numerous imported goods. Second, increasing purchases of U.S. goods will have a positive effect on the U.S. trade deficit. Third, increasing protection on intellectual property and refraining from currency manipulation will benefit overall trade. Finally, the increased agricultural purchases may allow the U.S. to reduce or eliminate the annual subsidies given to farmers.

What is the bad? The biggest problem with the trade deal is enforcement. How will the U.S. enforce stronger intellectual property rights in a foreign country? How will the U.S. prevent a foreign country from manipulating its currency? I am not sure there are answers to these questions. It is easy to make promises, but it can be hard to follow through.

Now the ugly. “Phase one” does not address the massive subsidies, cheap loans and assistance Chinese firms receive from the government. According to a Dec. 31 Washington Post article, “China now devotes more than 3 percent of its annual output to direct and indirect business subsidies — a share of the economy that is roughly equivalent to what the United States spends on defense,” according to economist Nicholas Lardy of the Peterson Institute for International Economics, a nonpartisan research group.

While I am not an expert on China, I suspect that it will not be easy for China to reduce these subsidies. Look at the U.S. Once the government hands out subsidies, it is difficult to reduce them. The economic agents receiving the subsidies fight to keep them.

Finally, I think China has to keep the money flowing. Do not underestimate the pressure the Chinese government faces as it tries to keep a billion citizens, who do not have all the rights we have, happy. Let us not forget about Tiananmen Square or the current protests taking place in Hong Kong.

Over the years, China has dumped excess production on global markets, depressing world prices for steel and other goods. How can this be profitable? The short answer is it is not. But thanks to government subsidies, Chinese firms can reduce prices while continuing to overproduce.

Why do these firms continue to overproduce? You guessed it — the Chinese government is trying to keep the unemployment rate low.

In summary, I think “phase one” is a good start to increasing trade with China.

However, the big issues have not been addressed, and enforcement is likely to be challenging.

I, personally, do not have a lot of hope for meaningful trade negotiations with China. I think China has too much at risk to make meaningful changes.

Kirk Lesh is an assistant professor of economics in the California Lutheran University School of Management.

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