Bury the US-China trade agreement
Bury the US-China trade agreement

Bury the US-China trade agreement

Two years ago, in an attempt to end their deepening trade war, the US and China signed an agreement promising China to buy an additional $ 200 billion worth of US goods and services in 2020 and 2021 from 2017 levels.

It involved a total purchase obligation of $ 502.4 billion over the two-year period. In the end, China bought with 57% of U.S. exports that it had promised to buy, or $ 288.8 billion, and thus bought none of the extra 200 billion.

But this lack, far from being a failure, should be a reason to celebrate. This is because the only way the so-called “Phase 1” agreement could have been fully implemented was for China to use the same non-market tools that have long confused U.S. firms trying to do business there.

Former US President Donald Trump started the trade war in 2018 with the aim of forcing China to stop its theft of the intellectual property rights of US companies, its and more generally the use of non-transparent regulatory measures that harm U.S. companies.

In January 2020, after several rounds of reciprocal tariff increases hit trade between the United States and China, the two countries reached a settlement that included the Chinese purchase commitments.

Although the agreement specified the quantities of various U.S. products that China was to buy, it did not prescribe any reduction in Chinese import tariffs or require China to make any legal and regulatory changes regarding the issues that had prompted Trump to start the trade war.

U.S. companies may think they have benefited from preferential treatment from China under the purchase agreement, which expired at the end of 2021, but they will inevitably lose when state control is again used against them.

These issues should instead be addressed in later rounds of negotiations, presumably after China has shown its commitment to legislative reforms by meeting its purchase obligations.

But without any obligation to reduce tariffs or solve structural problems, China could only fulfill its obligations under the Phase 1 agreement by once again resorting to opaque regulatory measures – except this time to favor US exporters and hamper their competitors.

For example, the Chinese authorities could have ordered state-owned enterprises to buy American goods or made it clear to private importers that they would benefit from doing the same to support “national policy.” Officials could also have ordered customs and health inspectors to favor U.S. goods over products from other countries.

In the short term, these measures would have increased US exports to China and benefited US companies, but their long-term costs would have been enormous.

By increasing China’s dependence on non-market mechanisms to support its political and economic goals, they would have made leveling the playing field in the Chinese market an even more distant prospect.

More importantly, economic coercion – even if it benefits America – is still coercive, reminiscent of a dark period in Chinese history where the British used similarly strong arms tactics to sell more opium to China.

Ultimately, even if doubling state control was merely an appropriate short-term tactic as part of a long-term strategy, this would hardly mean that Chinese politicians were somehow more committed to removing state control in the future. It’s like telling an alcoholic that the first step on the road to sobriety is to drink more.

The Biden administration should immediately seek to redress this trade policy imbalance by pursuing reciprocal tariff reductions with China. With US inflation rising to a high for four decadesending this damaging trade war as soon as possible should be a top priority.

It is no surprise that China prefers an agreement that strengthens state control and temporarily removes US pressure to implement structural reforms.

U.S. companies may think they have benefited from preferential treatment from China under the purchase agreement, which expired at the end of 2021, but they will inevitably lose when state control is again used against them.

Japan implemented many long-awaited structural reforms in the late 1980s and early 1990s, in part as a result of pressure from U.S. trade negotiators.

But the Phase One agreement makes it unlikely that US pressure will force the Chinese government to implement trade-related structural reforms. Chinese consumers and private companies will lose out as a result.

We should therefore celebrate that this flawed trade agreement was not fully implemented. But what should the next step be?

There is overwhelming evidence that the biggest losers from higher U.S. tariffs on imports from China are U.S. consumers and businesses that rely on Chinese commodities.

Four separated surveys have shown that Americans has worn almost the entire cost of these tariffs in the form of higher prices.

But President Joe Biden’s decision to let Trump’s tariffs be in place raises the question of whether U.S. trade policy has any concern for the welfare of U.S. consumers, or is instead driven primarily by the need to strengthen corporate profits.

The Biden administration should immediately seek to redress this trade policy imbalance by pursuing reciprocal tariff reductions with China. With US inflation rising to a high for four decadesending this damaging trade war as soon as possible should be a top priority.

(Chang-Tai Hsieh is Professor of Economics at the University of Chicago Booth School of Business)

Copyright: Project Syndicate


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