Trump’s ‘phase one’ deal with China won’t undo trade war damage

In his speech before the global elite in Davos, Switzerland, this week, President Donald Trump touted what he considers one of his biggest accomplishments, the “phase one” trade agreement with China. But the positive results of the deal remain on paper and in the future, while the damage caused by the bruising U.S.-China trade war will continue indefinitely.

To President Trump, the tariffs remain a point of pride. “These achievements would not have been possible without the implementation of tariffs, which we had to use. And we’re using them on others, too,” Trump told the Davos audience. “That is why most of our tariffs on China will remain in place during the ‘phase two’ negotiations.”

The agreement brought a welcome end to the escalating tariff war between the world’s two largest economies. It also committed China to enhance its protection of intellectual property and to end the forced transfer of technology by foreign companies that invest there. But it left punishingly high duties in place — and China’s commitment to ramp up its purchase of U.S. goods and services is unlikely to undo their damage.

Chapter 6 of the agreement commits China to dramatically increase its imports of goods and services from the United States. The agreement sets specific import targets, requiring China to increase its total imports from the United States to a level that exceeds the 2017 baseline by $76.7 billion in 2020 and $123.3 billion in 2021.

As a practical matter, the import targets appear to be unrealistic, given recent trends in U.S.-China trade. In the base year of 2017, before the Trump administration launched its tariff war, U.S. exports of goods and services to China totaled $186.3 billion. The trade war and China’s inevitable retaliation caused that total to drop by nearly $20 billion in 2019, so U.S. exports will need to grow not from the 2017 baseline but from the even lower 2019 totals. This will require an unprecedented increase of more than 50 percent in the first year alone.

Such demands are the worst of “managed trade,” which is not anything approaching free trade. It revives an approach that members of the World Trade Organization rightly agreed to forego in the 1994 Uruguay Round Agreement. By requiring China to meet specific dollar targets, the agreement favors U.S. products, arguably violating the core principal of non-discrimination that has undergirded the global trading system since the 1940s. The agreement may be vulnerable to challenge by other WTO members.

Such a massive increase in Chinese purchases of U.S. goods and services cannot be achieved through the normal channels of supply and demand. Instead, it will require even more intervention by the Chinese government in the operations of Chinese domestic producers, both private and government-owned. This will push China in exactly the opposite direction of the more market-oriented economy the Trump administration claims it wants China to adopt.

The phase one agreement also leaves in place U.S. tariffs on $360 billion on imports from China, and Chinese tariffs on more than half of U.S.-exported goods to China. Those tariffs are an open wound on the U.S. economy.

Numerous studies, including two released this month by the National Bureau of Economic Research (here and here), have found that the Trump tariffs have hiked costs for U.S. consumers, disrupted supply chains for U.S. producers and exporters, and reduced total U.S. trade and gross domestic product from where they would be without the tariffs. And the tariffs have done little to reduce the U.S. trade deficit that President Trump routinely complains about.

The chief victims of the U.S. trade war have been American farmers, who have lost billions in exports because of retaliation, and the U.S. manufacturing sector, which is flirting with recession because of the higher costs, disrupted trade, and global uncertainty inflicted by the administration’s tariff war.

Millions of U.S. households have also suffered from higher prices because virtually all the cost of the tariffs have been passed along to final consumers.

The phase one deal with China did indeed produce potential benefits for certain American companies that invest in China, but the costs imposed on American families, farmers and manufacturers have been huge, with no relief in sight.

Daniel Griswold is a senior research fellow and co-director of the Trade and Immigration Project at the Mercatus Center at George Mason University.