Is the China Trade Agreement a Christmas Gift for Americans?

COMMENTARY Trade

Is the China Trade Agreement a Christmas Gift for Americans?

Feb 20th, 2020 3 min read

Commentary By

Tori K. Smith

Jay Van Andel Trade Economist

Riley Walters

Policy Analyst, Asia Economy and Technology

Key Takeaways

Agreements on trade should be a “win win” for all parties involved.

The trade war is anything but over as negotiators have immediately begun negotiating a “phase 2” agreement.

By pursuing a strategy that prioritizes economic freedom, rather than industrial policy and protectionism, we can compete globally without becoming more like China.

 

This piece originally appeared in The Hill on 12/19/19

If the “phase 1” deal with China announced by the White House works out, Americans can consider it an early Christmas gift. Details are still sparse, and the agreement text will not be available until after the New Year. But for now, this is a win. Agreements on trade should be a “win win” for all parties involved. Even as pundits argue whether the United States and China is the bigger winner, however, the American people have won already by now avoiding a big lump of coal in their stockings this year.

>>>U.S.-China Trade Deal "Improves and Protects" America's Economic Well-being

That is because the tariffs scheduled to go into effect on $160 billion worth of consumer goods from China this month have been suspended indefinitely. Additionally, the tariff rate on another $120 billion worth of imports from China is expected to be reduced by half. The new deal also marks a crucial and very welcome change in trade policy by the Trump administration. It is the first time in nearly two years that President Trump has lowered tariffs, which act much like taxes on imports, for Americans.

The new deal, which covers agriculture, financial services, and currency issues, also appears to include key provisions on protecting intellectual property and deterring the transfer of technology. This easing of tension between American and Chinese negotiators should also help alleviate some of the pain felt by farmers and ranchers caught in the trade war.

Now for the bittersweet fact. While some tariffs have been avoided and others have been reduced, Americans pay more to import from China than when President Trump took office. Roughly $450 billion in imports from China cost more today than two years ago since the average tariff rate of the United States, or the average amount it costs for Americans to buy from abroad, has steadily increased under the Trump administration.

>>>White House Enters Into Hopeful "Phase 1" of China Trade Deal

This means that American families are paying more than the market price for basic goods, thereby unfortunately reducing their purchasing power. American businesses are also being squeezed as their input costs rise, which then undermines their abilities to produce competitively priced goods. The Trump administration has collected more than $38 billion in new taxes just from American consumers who import goods from China.

The trade war is anything but over as negotiators have immediately begun negotiating a “phase 2” agreement. While the announced deal is a nice reprieve from some of the tariffs, in addition to planned agricultural and manufactured product purchases by China, the legal foundation for the trade war has always been to get China to commit to significant structural reforms at home, particularly on the issue of intellectual property rights.

Beijing still has a long way to go to provide sufficient evidence that the government is no longer facilitating nor turning a blind eye to all of the inconsistent intellectual property protection practices occurring in China. The “phase two” negotiations should be seen as an opportunity to get at that and other issues, including trade distorting subsidies, disciplines around state enterprises, and digital trade policy. All these issues could serve as the core agenda of an ongoing dialogue that can yield results.

On the downside, this may mean some tariffs are likely to stick around for a while. With a new year and a new decade ahead, a strategy to decrease taxes should be the way forward on the trade front, coupled with strong enforcement utilizing existing tools. While we have long supported using targeted enforcement tools against China when it is appropriate, that enforcement has to also minimize any negative effects on Americans.

Instead, the Trump administration should take a targeted approach to punish those entities that steal or use stolen American products. This would avoid unnecessarily taxing consumers caught in the midst of the trade war. Getting other nations on board with efforts to get Beijing to make market reforms is just as important. The current negotiations with China should now include further tariff reductions made by both sides.

There are ways President Trump could work to defend our interests with respect to China without handicapping our own economy. By pursuing a strategy that prioritizes economic freedom, rather than industrial policy and protectionism, we can compete globally without becoming more like China. For now, we will have to wait to discover if the new deal is really a Christmas gift, or if it is simply a nicely wrapped white elephant present.

This piece originally appeared in The Hill on 12/19/19