Trump’s “Phase 1” Deal with China Promotes US Exports in the Wrong Way

A novel feature of the Trump administration’s “Phase 1” trade deal with China announced last Friday is that it would require China to increase its purchase of US goods and services by a total of $200 billion in the next two years. It’s a demand that, even if met, won’t accomplish President Donald Trump’s China-trade goals of promoting US exports and liberalizing the Chinese economy.

According to an accompanying factsheet published by the Office of the US Trade Representative, the agreement “includes commitments from China to import various U.S. goods and services over the next two years in a total amount that exceeds China’s annual level of imports for those goods and services in 2017 by no less than $200 billion.” In other words, China has agreed to purchase at least $200 billion more in American goods and services over the next two years.

On Sunday’s “Face the Nation” on CBS, US Trade Representative Robert Lighthizer touted the specific commitments on agricultural exports, claiming that, “what we have are specific breakdowns by products and we have a commitment for 40 to 50 billion dollars in sales. You could think of it as 80 to 100 billion dollars in new sales for agriculture over the course of the next two years. Just massive numbers.”

Such a dramatic jump in total exports to China would be a stretch, although not impossible to imagine. Before the Trump administration launched its tariff war against China 18 months ago, US exports to that country had been growing at a robust pace since the Middle Kingdom’s entry into the World Trade Organization in 2001. Between 2000 and 2017, US exports of goods and services to China soared from $21.5 billion to $186.3 billion—almost a ninefold increase, or an average increase per year of almost $10 billion. As the nearby graph shows, that trend reversed in 2018–2019 as the US-China trade war began to take its toll.

If US exports had kept climbing at the same pace, absent the US-China trade war, American producers could have exported an additional $18 billion in 2018 and another $37 billion in 2019 (based on trade through the third quarter). That’s $55 billion in US exports that were arguably forfeited because of the Trump administration’s ill-advised tariff offensive and China’s predictable retaliation.

The Phase 1 agreement will require that China buy US exports of goods and services in 2020 and 2021 at a level that is $100 billion a year above the 2017 baseline, or $286 billion a year. That would be $131 billion more ($71 billion in 2020 and $60 billion in 2021) than what the trend would have been absent the trade war. If one factors in the shortfall in exports in 2018–2019, then this addition would represent a $77 billion increase in total exports over trend for the four years after 2017. That’s less than $20 billion a year in additional exports over what the United States might have reasonably expected without the whipsaw of the Trump trade war—not that big a deal for the $20 trillion US economy.

As Lighthizer noted, the Phase 1 deal includes specific demands for the purchase of US agricultural products, stipulating that China purchase a minimum of $40 billion a year in US farm goods in 2020 and in 2021. That would be a $16 billion a year increase from the $24 billion in farm exports to China in 2017. It would be welcome news for US farmers, but its impact would be diminished by the steep decline in US farm exports since the trade war started 18 months ago. It would certainly not represent $80 to $100 billion in “new sales” of US farm products to China touted by the administration.

Even if China meets the target for total export purchases demanded by President Trump, the gains may be largely canceled out by declines in US exports to other major trading partners. That’s because, to meet the target, China will need to acquire tens of billions of additional US dollars to pay for the agreement’s required imports of US goods and services. That will increase global demand for US dollars, driving up the dollar’s value in foreign exchange markets and making it more costly for foreigners in other countries to buy American exports. Strong-arming China to buy more American goods and services may merely divert sales to China that would have gone to other nations, rather than creating a net increase in total US exports.

A bigger problem with the requirement that China buy additional US exports is that it directly contradicts the negotiating demand that China liberalize its economy and relax centralized control over trade and investment. How much people in China spend on US goods and services will not be determined solely or primarily by the market but by directives from Beijing. The Trump administration is demanding purchasing targets not only for the separate categories of services and farm, manufacturing, and energy products, but for subcategories such as oilseeds, cereals, and vehicles. If China fails to meet the targets for how much it must buy, even if there is no real demand in its economy for these products, it could face the re-imposition of US tariffs on its exports.

This is not free trade; it is managed trade. It takes America back to the 1980s when the United States and other countries attempted to bully trading partners into accepting “voluntary” export restraints or minimum purchases. One of the many accomplishments of the Uruguay Round of the General Agreement on Tariffs and Trade in 1994 was that it discouraged the use of import and export quotas as a tool of trade policy. Instead, it emphasized the reduction of tariff and nontariff trade barriers so that trade flows would be determined by international supply and demand, not by government planners.

With its demand that the Chinese government fulfill what are in effect quotas on purchases of US goods and services, the Trump administration is only reinforcing the sway of the hardliners in Beijing at the expense of more promarket reformers. All for a promise of more exports that may or may not ultimately materialize.