Date: Thursday, February 10, 2022
Former President Donald Trump claimed his strong tariffs forced the Chinese government in December 2019 to make a trade deal headlined by $200 billion in annual commitments to purchase U.S. exports. The reality: China ended up buying none of the promised goods and the trade war did little to change China’s economic policymaking while hurting the U.S. economy.
That’s the verdict of Chad Bown, senior fellow at the Peterson Institute for International Economics.
His analysis of new Commerce Department data shows that China only bought 57% of the total goods and services it committed to purchase in 2020-21, falling short of even the pre-trade war baseline of 2017. China ended up buying none of the additional $200 billion exports agreed to. In fact, U.S. exports to China likely would have been 19% higher without a trade war and the “phase one” agreement.
Most of Trump’s tariffs remain in effect to this day, harming most U.S. companies, and Bown said by not negotiating an end to China’s tariffs the agreement may have only served to bolster state-owned enterprises that purchased most of the U.S. exports.
“Today the only undisputed ‘historical’ aspect of that agreement is its failure. One lesson is not to make deals that cannot be fulfilled when unforeseen events inevitably occur — in this case, a pandemic and a recession. Another is not to forget the complementary policies needed to give an agreement a chance to succeed,” Bown said in a report published Tuesday.
The deal did have some positive elements that Bown said should be continued, including China’s agreement to get rid of some technical barriers to agricultural trade, protections for foreign intellectual property and forced transfer of technology, and opening up its financial services sector.
But in terms of reducing the U.S. trade deficit, the agreement suffered from the lack of a comprehensive policy approach toward China, according to the international trade expert. Bown has previously said that the Trump administration tackled only one side of the problem — insufficient exports to China — instead of targeting specific Chinese tariff or non-tariff barriers. In effect, the Trump White House went for a quick fix that played well politically without addressing the structural problems in China’s behavior that present a long-term disadvantage for U.S. businesses.
Hitting the $504 billion target was hindered by the preceding two-year trade war, which put U.S. exporters in a big hole. In 2019, before the “phase 1” deal kicked in, U.S. exports to China were $14 billion lower than in 2017, Trump’s first year in office. Exports had difficulty reconnecting with buyers just to make up the deficit before they could begin chipping away at the additional $200 billion in sales, according to Bown.
The agreement prescribed four specific areas — manufacturing services, agriculture and energy — and the dollar amounts China was supposed to spend on U.S. products.
Manufacturing represented more than 40% of the agreement’s value, but China only purchased 59% of the commitment for U.S. exports. Automobiles and aircraft were the two biggest U.S. exports prior to the bilateral dispute, but automakers that were assembling vehicles in the U.S. to be shipped to China moved production out of the U.S. when China retaliated against the Trump administration tariffs and it never returned. The decline in aircraft sales was tied to grounding of the Boeing 737 MAX fleet after two deadly crashes, with Boeing even shutting down production for many weeks and China ending purchases while aviation authorities investigated and examined technical corrections to the avionics.
Services, such as tourism and education, were devastated by the pandemic and travel restrictions.
Agriculture — the biggest political part of the agreement for Trump, but relatively small in economic terms (14%) — fared the best of the four sectors. Soybean farmers, who saw their exports crater because of the trade war and received tens of billions in subsidies, benefited from China achieving 83% of its purchase commitments.
Bown suggested that U.S. exports were likely hindered by overwhelming import demand that swamped port and landside infrastructure, creating shortages and delays that incentivized ocean carriers to focus on circulating containers back to Asia as fast as possible because margins are far more lucrative.
Many exporters, primarily agricultural shippers, have complained for more than a year that they can’t get equipment or space on vessels because shipping lines are much more selective.
The purchase commitments excluded more than a quarter of U.S. goods exports to China, which had little incentive to buy the product from the U.S. because they would not be credited, Bown said. Those goods, predictably, performed even worse than the ones covered in the deal.
The Biden administration has left most of the Chinese tariffs intact and has yet to articulate comprehensive trade strategy with regard to China, leaving businesses with great uncertainty about the ease of doing business and whether to continue investing in more trade infrastructure.