Washington, DC: The "phase one" trade deal between the United States and China addresses only some of the US government’s concerns, and its remaining demands will be much harder to resolve. But while both America and China have an interest in the success of the open multilateral global trading system, current US policy is undermining that goal.
After
nearly 18 months of tit-for-tat tariff increases, the United States and China
have reached a “phase one” agreement to start de-escalating their trade war. As
part of the deal, US President Donald Trump canceled further tariff increases
on Chinese goods that had been scheduled to take effect on December 15, and
halved a 15% tariff on $120 billion worth of imports from China. As for China,
it shelved its planned retaliatory measures and committed to import some $50
billion worth of US agricultural products in each of the next two years.
But the
promised de-escalation should not be overestimated. For starters, it is not
clear how China could follow through on its import commitment without violating
the World Trade Organization principle of non-discrimination among trading
partners. Moreover, the 25% US tariff on $250 billion of Chinese imports
remains in place, with further reductions linked to progress in future trade
negotiations.
In fact,
the current agreement addresses only some of the US government’s trade-related
complaints against China, and its remaining demands will be much more
challenging to resolve. Broadly speaking, the US wants the Chinese authorities
to take steps to eliminate their country’s bilateral trade surplus with the US,
end “currency manipulation,” cease intellectual-property (IP) theft, refrain
from further forced technology transfer, halt subsidies to state-owned
enterprises (SOEs), and stop acquisitions of US companies through
state-sponsored investment.
If this
were a negotiation, one might sensibly ask what the Chinese authorities were
seeking from the US in exchange for its steps in these areas. But this is not a
negotiation: the Trump administration is presenting China with a set of
demands, which, if unmet, will result in “punishment.”
There
are three major problems with the American demands. First, some of them are
conceptually erroneous. Second, in a global trading system, bilateral action
often results only in a rearrangement of trading partners. Third, it is not
clear what the Chinese government could do to satisfy some of the US demands.
For
starters, the demand that China eliminate its bilateral trade surplus with the
US is misguided. There is no reason why merchandise trade balances should
matter at all. For one thing, services trade is equally important. Exporting
financial services is almost certainly more economically rewarding than
exporting coal, for example. Moreover, some countries offer many more
worthwhile investment opportunities than others. Citizens in countries with
less attractive opportunities benefit from buying assets where the return is
higher, and these investments are financed by current-account imbalances. Even
then, bilateral balances are irrelevant. The current-account balance is the
difference between domestic investment and domestic saving (in the private and
public sectors), and the US deficit is global: if one country reduces its
surplus with America, the US economy will simply adjust both imports and
exports.
The US
demand regarding currency manipulation reflects a similar fallacy. The apparent
intent is to reduce America’s bilateral trade deficit with China, but until the
US savings-investment balance changes, that will not happen. US law stipulates
three criteria for identifying currency manipulation by a trading partner: a
global current-account surplus of more than 3% of GDP; persistent intervention
to buy foreign exchange and sell domestic currency; and a bilateral trade
surplus with the US of more than $20 billion. Because China currently meets
only the third condition, it is not a currency manipulator under US law (that
did not stop the Trump administration from labeling the country one in August).
The
other US objectives – regarding IP theft, technology transfer, subsidies to
SOEs, and investment requirements – can satisfactorily be addressed only at the
multilateral level. Like any WTO member, the US can bring a complaint when it
believes that a trading partner has not abided by WTO rules (which, admittedly,
could be strengthened). But the Trump administration has filed only two cases
against China, despite the fact that the US had previously won 91% of the cases
it brought to the WTO, and even though the Chinese authorities have a good
track record of amending their practices when WTO panels have ruled against
them.
When WTO
rules do not cover a particular case, members should seek to amend them.
Moreover, other major US trading partners – notably Canada, the European Union,
and Japan – have voiced many of the same trade concerns regarding China. If the
US joined forces with them, they would have much greater bargaining power
vis-à-vis China than America would have on its own.
But
instead of using the WTO, the Trump administration – incredibly – is
undermining it by blocking the appointment of new judges to the organization’s
Dispute Settlement Body. The DSB should have seven appointed members, of whom
three must be on any panel hearing a case. But because the US has consistently
vetoed candidates to replace judges who have completed their terms, the DSB now
has only one member, and thus can no longer function. Although the DSB
certainly could be rendered more effective, it has been very useful in settling
disputes and preventing trade wars. Dismantling the entire process makes no
sense.
Finally,
even regarding valid US concerns, there is no indication regarding what changes
the Chinese government should make to satisfy the Trump administration. It is
in both America’s and China’s interest that the open multilateral global
trading system prosper and support economic growth worldwide. Unfortunately,
there is little prospect that current American policy can achieve that goal.
***Anne
O. Krueger, a former World Bank chief economist and former first deputy
managing director of the International Monetary Fund, is Senior Research
Professor of International Economics at the School of Advanced International
Studies, Johns Hopkins University, and Senior Fellow at the Center for
International Development, Stanford University.
https://www.project-syndicate.org/commentary/united-states-china-trade-war-could-reignite-by-anne-krueger-2019-12