Newsletter 3 - December 16, 2019
Last week was a big one when it came to trade. On December 12 news broke that the U.S. and China had reached agreement on a “phase one” trade deal (details from Reuters here), while of couple days earlier it was the turn for the U.S.-Mexico-Canada Agreement, which despite some hiccups, looks headed to Congress for approval.
But even with the new seeming focus on conciliation, it’s obvious that trade frictions aren’t likely to end anytime soon. Meanwhile, the Trump administration’s effort to further hobble the World Trade Organization moved forward with the shutdown of a key WTO adjudication court on December 11.
Lets start with a GIF from the folks at the Peterson Institute for International Economics that gives one a sense of what it’s been like to follow trade news this week:
Costs substantial, benefits narrow
Weighing in on December 13 with one of his typically well-informed and sober analyses on the U.S.-China economic relationship, CSIS Scott Kennedy wrote that “the costs have been substantial and far reaching, the benefits narrow and ephemeral" in the process of reaching the phase-one trade deal.
Kennedy pointed out that it appeared as if “ with only limited concessions, China has been able to preserve its mercantilist economic system and continue its discriminatory industrial policies at the expense of China’s trading partners and the global economy.”
‘Dud of a Deal’
Similarly pessimistic was Bloomberg Opinion’s David Fickling who compared the Trump administration’s tariff-led efforts to force concessions out of China as “punching itself in the face” while noting that what he called the “Dud of a Deal” had little to show for itself.
It’s way too early to be calling any successful conclusion of the U.S.-China trade war with this phase one deal and some are questioning whether there will be a second phase or any more deals at all, before next year’s presidential election.
“After the ups and downs over the past two years that led to a partial deal, I’m not sure both countries have the stomach to get back into these issues with any urgency,” said former trade negotiator Wendy Cutler to Bloomberg News. “A phase one trade deal is a welcome step. But it looks like this deal will fall way short,” she added.
Trade deal success? ‘We’ll know in five years”
Asked earlier in the week whether Trump was likely to accomplish his goal of remaking the U.S.-China trade relationship, Jamie Dimon, the chief executive officer of JPMorgan Chase & Co. told us we will have to wait: “We don’t know yet because it’s not done yet,” Dimon said. “We’ll know in five years.”
Of course he’s right—it’s silly for anyone to suggest that they already know whether the deal will work—an answer won’t come for probably much longer than five years; that’s because deal promises are one thing, actually meeting them is another. After all, China’s poor record living up to market-opening WTO commitments—made almost two decades ago when it entered the World Trade Organization in 2001-- is what brought us to the trade disputes of today.
As I wrote in the pages of BusinessWeek back in 1999, “China's agreement paving the way for entry into the WTO won't produce an overnight miracle”, thus possibly making the understatement of the year.
China Model Ain’t Gonna Converge with West
One reason to be skeptical that China has any intention of abandoning its state-led, subsidy-fed economy is because Xi Jinping has long been openly supportive of it. Gavekal Dragonomics China research director Andrew Batson has unveiled the results of some sleuthing on what China’s top leader really think when it comes to economics.
As Batson writes in a December 14 blog, Xi sees that “China’s model will not and cannot converge with that of Western developed countries. And Xi had all this worked out all the way back in 2001, at the height of the euphoria surrounding China’s entry into the World Trade Organization.”
(By the way, to get a regular stream of insights into the real economics behind China’s economy, you should be regularly reading Batson’s very useful blog.)
What are others thinking?
A survey by the European Chamber of Commerce in China shows that smaller European companies are the ones suffering in the crossfire of the trade war. While large firms are able to “side-step” the impact through strategies such as “rejigging their supply chains and leveraging their global corporate networks,” smaller firms have been unable to evade the tariffs and have endured a “steady beating.”
A ‘black day’
Meanwhile, Carl Bildt, noted diplomat who now serves as Co-Chair of the European Council on Foreign Relations, tweeted on December 11 that it was a “black day for our multilateral trading system” as the WTO took a body blow, with its key adjudication body shut down for lack of judges, as per the Trump administration’s intention.
The New NAFTA
While Trump crowed about the passage of the U.S.-Mexico-Canada Agreement others were correctly pointing out that it was no more than an update to Nafta. Indeed, for a hint at how the Canadians view it, see this tweet from the Canadian deputy prime minister where she refers to it as the “new NAFTA”:
Peterson Institute for International Economics fellow Chad Bown offers his perspective on the trade war truce in this NPR podcast.
New Pew Research Center poll results shows that while emerging markets welcome China’s economic growth, its closest neighbors are more wary.
National Bureau of Economic Research paper looks at tariff impact on the U.S. and finds that "counties in the upper quartile of the retaliatory-tariff distribution experienced a 3.8 pp decline in consumption growth” and decline in employment growth, concluding that “Chinese retaliation is leading to concentrated welfare losses in the US.”