In trade ‘deal,’ China suggests we simply have an agreement to agree
President Trump triumphantly announced a “tremendous” trade deal with China on Friday, tweeting, “The deal I just made with China is, by far, the greatest and biggest deal ever made for our Great Patriot Farmers in the history of our Country.” Beyond agriculture, Trump claimed that “other aspects of the deal are also great — technology, financial services, 16-20 Billion in Boeing Planes etc., but WOW, the Farmers really hit pay dirt!”
His comments pertain to an apparent agreement by China to purchase $40 billion to $50 billion worth of agricultural products, in addition to commitments to open up its financial markets and improve intellectual property protections.
But clearly, the biggest immediate winner is China — it won a reprieve from a planned tariff increase on $250 billion worth of goods that was due to take effect on Oct. 15. The increase originally was scheduled to become effective on Oct. 1, but Trump telegraphed their termination by offering a two-week extension ahead of trade talks.
Contrary to the president’s braggadocio, China’s official response outlined in the People’s Daily does not inspire much confidence: “People believe that only by removing all the levied tariffs to seek a true trade war truce, taking constructive moves to seek trade balance and seeking a ‘maximum common divisor’ for common interests, can trade and economic problems be resolved.”
The Chinese indicated this deal is far from done: “The final outcome will depend on whether the U.S. can walk together with China, and create the necessary and sufficient conditions to push ahead.” China seems to suggest that all we have is an agreement to agree, and that nothing actually has been decided.
So, the devil really will be in the details, as the cliche suggests. The fact that China obtained an immediate victory — a cancelled tariff increase — while relinquishing nothing hard immediately conforms to its consistently shrewd negotiating strategy. The onus is on the negotiator-in-chief to ensure that he gets something back immediately in any written agreement.
There are grounds for optimism that Trump could succeed where others have failed before him. For starters, he has bucked Chinese attempts at exerting pressure via domestic politics, braving the wrath of those affected by Chinese counter-measures. Trump managed to convince his base that short-term pain is worth the price for long-term U.S. strategic interests. He has mitigated the pain for farmers through market facilitation payments totaling $12 billion.
The short-term pain is incontrovertible. America’s exports of goods to China totaled $120.3 billion in 2018, 7.4 percent lower than 2017. Conversely, America’s imports of goods from China went up despite the trade war — rising 6.7 percent from 2017, to reach $539.5 billion. And what’s more troubling, despite the saber-rattling by Trump and the prolonged trade war, America’s trade deficit in goods actually increased, totaling $419.2 billion in 2018, an 11.6 percent increase from 2017.
If China really changes its trading behavior in response to Trump’s trade war, it will have drastic impacts on the economies of many countries. Consider just what apparently was agreed to last week: China’s plan to increase its agricultural goods imports from the U.S. Recall that total agricultural exports from the U.S. to China in 2017 totaled $23.8 billion. Soybeans alone represented 52 percent of that total. Since the trade war, U.S. agricultural exports, specifically soybean exports, have been drastically hit and farmers have suffered.
Soybean exports fell 75 percent in 2018. U.S. agricultural exports fell from $19.5 billion in 2017 to $9.1 billion in 2017. Now, if China has to up its purchase of soybeans by $40 billion, that action will drastically hit other countries where it buys soybeans — Brazil, which accounted for 52.8 percent and Argentina (6.6 percent), compared to the U.S., which provided 35 percent in 2017. Countries such as Paraguay, Uruguay, Brazil and Argentina will be badly hit if China transfers its consumption of soybeans away from them to the U.S.
More broadly, China’s largest agricultural imports source countries include Brazil, Canada, Indonesia, Thailand, Australia, Argentina and Vietnam. Its food products largely come from France, the U.S., Australia, the Netherlands, Peru, Germany, New Zealand, Thailand and Brazil. If China transfers its sourcing from these markets to buy more from the U.S., it will have devastating impacts on the economies of these countries.
The impact will be similar in the case of aircraft (which Trump referenced in his tweet) and industrial goods, hitting primarily European markets.
While there is potential for these transfers to take place, China may be reluctant for purely pragmatic reasons. As is obvious, the China-U.S. trade war is much larger than trade — it is merely one manifestation of great power rivalry. If China does indeed buy $50 billion worth of agricultural products from the U.S., it will become extremely dependent on us for its food security. Why would any country embrace such existential vulnerability?
Therefore, it stands to common sense that as long as the U.S.-China relationship is characterized by competition and distrust, China will diversify its food and agricultural imports to avoid over-dependence on its main rival. Similarly, it will not put all its eggs in the basket of its rival regarding imports of critical aircraft, machinery and industrial goods.
Where does all this leave us? Unfortunately, the global realignment of trade to bring about a balance in trade between the U.S. and China may be a chimera. Aside from a gargantuan leap in services exports to China, the U.S. does not appear to have much room to dent the trade deficit.
Bigger picture, Trump’s transactional approach of putting business above distrust has the potential to move the relationship from competition to cooperation. As the president has shown in relation to Huawei, he has eschewed dogma and adopted pragmatic positions prioritizing U.S. interests. If this approach de-escalates conflict and builds trust, everyone wins. And long-term U.S. interests are better served by cooperation with China than by zero-sum competition.
Sandeep Gopalan (@DrSGopalan) is vice chancellor and executive vice president of academic affairs at Piedmont International University in North Carolina. He previously was a professor of law and pro vice chancellor for academic innovation at Deakin University in Melbourne, Australia. He has co-chaired American Bar Association committees on aerospace/defense and international transactions, was a member of the ABA’s immigration commission, and was dean of law schools in Ireland and Australia. He has taught law in four countries.