Yesterday, in a post on the “phase one” trade deal with China, I predicted:
As new information comes out, I expect the deal to look even weaker, even more porous.
And today we have confirmation:
Donald Trump says China will spend $50 billion a year for U.S. farm products as part of a “phase one” trade deal between the countries. But doubts are surfacing whether that’s even possible, bolstered by China’s reluctance to confirm the figure. . . .
Prices for soybeans and hogs initially surged Friday as the deal was announced, but later retreated after Chinese officials said their imports would increase by “a notable margin,” but refused to be more specific. . . .
Lighthizer suggested that the higher figure is aspirational. He told reporters Friday that China has agreed to raise its annual purchases of U.S. agricultural goods to $40 billion annually for the next two years and make its best efforts to reach $45 billion per year. Beijing agreed to specific benchmarks for individual commodities but those will be classified, he added. The goals will be re-examined after that, a U.S. trade official said. . . .
China won’t buy agricultural products from U.S. producers to meet the target if it can purchase them for less from competitors such as Brazil, the person said.
“Aspirational”? Hmmm . . . . While I don’t doubt that China’s food purchases will increase substantially from the recent depressed levels, there is reason to doubt whether this will dramatically improve farm incomes:
Extra shipments to China could crowd out export customers in Europe and the rest of the world, forcing them to turn to Brazil for supplies in a mirror image of trade flows that occurred during the tariff war, said Richard Feltes, vice-president at RJ O’Brien, a commodities broker.
Mr Glauber said China’s commitments could draw scrutiny from other food exporting countries that may question “whether US products have been guaranteed preferential access” for tariff-rate quotas that are supposed to be applied on a most-favoured nation basis under global trade rules.
The basic problem is the “fungibility” of commodities. Our soybeans aren’t much different from Brazilian soybeans. When China reacted to the trade war by shunning our farm goods, we sent them elsewhere. Meanwhile, other exporters such as Brazil filled the gap. The net effect was almost zero; except for the extra transport costs as trade flows no longer were based on cost considerations. Commodity prices are mostly set on global markets (with a few exceptions), based on global supply and demand. Notice how US farm exports kept rising, even as China cut back in 2018:
People in each country don’t materially change their food consumption during a trade war, and hence global food prices don’t change all that much. The effects are not zero (our farmers suffered some losses), but they were smaller than you might imagine. Trade wars don’t tend to work because combatants aren’t willing to make the hard choices that would have a major impact. President Trump is not willing to have a situation where consumers show up at Walmart and the shelves are empty of Chinese goods. Similarly, the Chinese are not willing to materially change the amount of calories they consume each day.
This is NOT to say that trade wars have no impact. They do. They distort the flow of goods to some extent, and both the US and the Chinese economy were (mildly) negatively impacted by the trade war. But the costs are not great enough for the Chinese to give in on the issues that are important to them, including their industrial policies toward SOEs and their ability to control their exchange rate.
Places like Cuba, North Korea, Iran and Venezuela have not caved in despite pretty severe sanctions from the US. Why would China surrender in response to comparatively minor sanctions?
President Trump is relatively “hawkish” (i.e. mercantilist), on trade issues. If even his negotiations with China, Mexico, and Canada have produced only trivial results, what realistic prospect is there for an alternative to globalization? As Margaret Thatcher used to say, “There is no alternative”.
Trump often claims that Boris Johnson is Britain’s Trump. But Johnson has committed to negotiating free trade agreements with many different countries. There are even rumors that Britain might try to join the TPP. Trump could benefit from following Johnson’s lead on trade.
PS: The current trade war is causing China to turn away from American tech products:
Tech spats between China and the US have encompassed smartphones and social media apps — and now the humble office keyboard.
This week’s news that Beijing has ordered all government offices and public institutions to remove foreign computer equipment and software within three years marked another example of “decoupling” between the two countries’ tech sectors.
And it’s not just the Chinese government; the private sector is also turning against US products:
However, if China’s PC industry follows recent trends in mobile and tablet markets, where local brands compete as evenly on aesthetics and power as their foreign premium-price rivals, then US groups will have cause to worry.
“There is already a patriotic shift in consumer electronics buying patterns due to the trade wars. You can see it in the tablet and smartphone markets now,” said Eric Smith, director of Connected Computing Devices at Strategy Analytics. “Local vendors like Huawei and Xiaomi are poised to take advantage of this.”
More reason to “just say no” when politicians call for America to get tough on trade.
READER COMMENTS
Thaomas
Dec 15 2019 at 7:00am
If the objective of the “trade war” is to damage the Chinese economy for geo-political reasons, the gambit was marginally successful. The described result is that Chinese government will interfere more with trade to their detriment. Whether this will harm them more than the US intervention in our trade relations is to be seen.
Jon Murphy
Dec 15 2019 at 9:55am
Aye, but that’s a mighty big “if.” And doesn’t jive with Trump’s (sometimes) insistence of reducing Chinese tariffs (since a more open China would strengthen, not weaken, their economy.
The trade war has no clear objective. It changes every day: punish China, protect IP, bring back manufacturing, reduce tariffs, increase US exports, make China more market-oriented, make China less market-oriented, optimal tariffs, national defense, infant industry (yes, I once heard someone use the “infant industry” justification for tariffs on steel). Given the lack of clarity, the trade war can be indefinite.
Scott Sumner
Dec 15 2019 at 1:17pm
That’s my view as well. The trade war had no clear objective; indeed the grab bag of various objectives were internally inconsistent.
David S
Dec 16 2019 at 12:19am
We have been through this as a country before (with both the Soviet Union and Iraq). Typically, when the reasons being given in public are flaky and constantly changing it has been because the real reasons are classified and would start a war (or a worse war, in Iraq’s case) if known.
Jon Murphy
Dec 16 2019 at 7:32am
Eh, I don’t think that’s correct, David. Iraq was all about supposed WMDs (which we know they had because we sold wmds to them in the 80s). The invasion was always about destroying this wmds. Ultimately, the government said that justification was based on faulty intelligence. But the objective never changed.
Same with the Soviet Union. It was always about containing communism.
Neither of your examples exhibit the radical and often contradictory nature of the present Administration’s trade war rationale.
Thomas Sewell
Dec 19 2019 at 8:32pm
The trade war had a clear objective, gain votes among blue collar workers in swing States who don’t understand trade. Based on various polls, it appears to have at least partially accomplished that objective.
Like almost everything done in D.C., the actual economic effects are secondary considerations.
Thaomas
Dec 16 2019 at 6:48am
Agreed, there has never been a coherent rationale stated for the trade wars, but malevolent intent toward foreigners even thought the measures harm domestic interests does seem to be a recurrent theme of the President’s rhetoric whether in trade or immigration.
Phil H
Dec 15 2019 at 11:17am
The claims at the end there are pretty weak. Chinese corporate buyers may prefer Chinese brands? If Chinese producers create products that match American brands for quality and aesthetics? That’s just saying that Chinese brands get more market share when they make better stuff – something we should all hope is true! It’s so easy to sensationalize the rise of China as the fall of something else, but it isn’t (necessarily).
Scott Sumner
Dec 15 2019 at 1:19pm
Phil, I interpreted that final claim as referring to consumer purchases. I’d guess that (non-state) corporate purchases would be less swayed by nationalistic considerations.
DrT
Dec 16 2019 at 1:56pm
Dr. Sumner’s argument is implicitly a single period, non-game theoretic argument. In a multi-period repeated game, free trade need not emerge as the optimal solution and indeed the space in which it is optimal may be rather small. By imposing tariffs or limiting imports, an authoritarian regime can successfully protect a nascent industry and grow it to be globally competitive especially if that strategy is accompanied by intellectual property theft and industrial espionage. And if that regime purposefully sets about acquiring important natural resources to that industry, the regime may well be able to emerge in one or two decades as the global powerhouse in that industry. Members of the Development Research Council of the State Council of the PRC don’t even bother to hide this strategy. They have been open about it at least since 2008. Various forms of protectionism may be the only way to prevent them establishing an overwhelmingly dominant market position. Moreover, the Chinese are unafraid to use conventional military force. That together with a dominant trade program can create a very powerful lever to move the rest of the world. This is classic Clauswitz and Sun Tzu. With respect, Dr. Sumner is naive to believe this is simply about current and near future consumer prices.
Jon Murphy
Dec 19 2019 at 9:32pm
The infant industry argument is an old argument for tariffs and has been successfully challenged many times in terms of its effectiveness. Industries protected by tariffs, infant or otherwise, simply do not grow compared to non-protected industries. Excluding public choice and knowledge problems, the infant industry argument only holds in the absence of capital markets.
Besides, if infant industry is the justification for China’s tariffs, then that’s just further evidence that Trump’s trade war won’t hurt them but would instead help China.
Warren Platts
Dec 17 2019 at 10:55am
According to the Department of Defense, up to 3 million people in China are interred in concentration camps for having the wrong religion. We have seen this movie before. Unless you can defend trade with Nazi Germany as a morally neat idea, then you cannot consistently maintain that we should be trading $1 worth of business with China.
Jon Murphy
Dec 17 2019 at 1:56pm
Which brings us back to the question Pierre asked you yesterday:
Why, then, is President Trump begging China to let him reduce tariffs?
Lorenzo from Oz
Dec 17 2019 at 7:25pm
President Xi believes in Making China Great Again and his regime is pushing xenophobia on a scale that puts anything in the West into comparative triviality. This is just one YouTube discussion of the matter. Here is another.
It started well before November 2016, but the Trade War likely didn’t help, but in the “grist for the mill” form not in actually affecting the tendency of events.
Which goes back to previous discussion: the Beijing regime has no intention of going quietly into that democratic night.
Lorenzo from Oz
Dec 17 2019 at 7:31pm
BTW, I disagree with the Fascism/Third Reich analogies with the Beijing regime (too many structural/ideological differences). But the Second Reich analogy–a society whose economic modernisation clashes with its patterns of political authority–is strong.
Belt and Road is Xi’s alternative to Weltpolitik. It is less blatantly militaristic and expansionary, but the underlying motivations are pretty similar. And the South China Sea strategy seems very much about the Beijing Regime seeking to dominate the environment around it.
The Second Reich analogy is not encouraging, because we know where that led and there is plenty of xenophobic chauvinism being pushed by the Beijing regime. The reticence over Hong Kong is somewhat reassuring, but that is a story not ended yet.
Lorenzo from Oz
Dec 17 2019 at 7:33pm
The comment starts BTW because I made a previous comment but it had two links, that seems to trigger spam limits or something.
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