Welcome to the trade jungle
Consequences of U. S.- China deal will concern everyone
There is less to the Phase 1 China– U. S. trade agreement than the initial fanfare in the U. S. would suggest but the negative consequences for the global trading system should be of concern to others, including Canada. Even more ominous perhaps are the dramatic moves China is making to develop Artificial Intelligence ( AI), which will likely be the major driver of economic growth and security prowess in the next quarter-century.
President Donald Trump wanted his tariff war to reduce the U. S. trade deficit with China. That deficit has actually increased from US$ 544 billion in 2016 to US$ 691 billion in the 12 months ending in October 2019.
The administration had also intended to dismantle the core of China’s industrial strategy — extensive subsidies and other forms of state assistance that have stimulated the growth of many Chinese companies. The U. S. sought explicitly to prevent the theft of intellectual property and the forced divestiture of foreign technologies. While there is reportedly some agreed language on each of these issues there is no indication of precise commitments or enforcement measures. The U. S. could have enhanced its leverage on each by enlisting support from such key allies as Canada, Japan and the EU. Instead, the Trump administration chose to go it alone suffering from delusions of “America First” grandeur. These thorny issues have been effectively punted to Phase 2.
In Phase 1, the U. S. essentially agreed to roll back some tariff increases and suspend ones that had been planned for future implementation. In return, China agreed to lower import tariffs on almost 1,000 U. S. goods and to purchase more from America over the next two years. The Americans claim that China promised to buy $200B more exports from the U. S. than the total in 2017, including $ 40B of U. S. farm products, but the Chinese said simply that they would “significantly increase” purchases.
Complete details of the agreement will be revealed when the pact is signed on Jan. 15.
Success is in the eye of the beholder. The spin from the U. S. administration bristled with optimism. But, according to persistent Trump critic Paul Krugman, the agreement proved that the president “talks loudly but carries a small stick.” Krugman also reported in The New York Times that Chinese officials are “jubilant and incredulous at the success of their hardline negotiating strategy.”
Having all the time in the world for negotiation, the Chinese chose to wait the Americans out knowing that Trump needed something he could celebrate as a victory on the eve of the 2020 elections. In the end, Trump blinked, presuming that some relief from the trade war just before Christmas was better than none.
It is at best a truce, one that elicited a predictably positive response from the U. S. stock market. Any strand of certainty or a pause in the trade war came as a source of relief.
The global response has been much more muted. Most troubling is that any substantial increase in Chinese purchases from the U.S. will come at the expense of imports from others, including Canada. It is “trade diversion” or “managed trade” in the crudest sense compounded by the fact that China is granting preferential tariff access to the U. S., e. g. on pork and other products below the Most Favoured Nation (MFN) levels that act as a rudder for global trade. This directly violates the fundamental rule of law governing global trade which the WTO is intended to uphold. Challenges might be mounted except that the U. S. has, despite having won more than 90 per cent of their challenges to date, effectively emasculated the WTO’S adjudication power by refusing to nominate panellists to the rosters of the Dispute Settlement mechanism.
What this agreement portends is a ‘ law of the jungle’ trade world where the most powerful joust for the upper hand leaving middle and small powers to fend for themselves as best they can.
Prime Minister Justin Trudeau unwisely called publicly on the U. S. to refuse to sign the new trade accord until China released the two Canadians held in detention without legal recourse for more than a year. ( A private request might have gained some traction.) However, Chinese officials abruptly rejected the call and Trump is unlikely to dilute what he wants to celebrate as an unvarnished trade victory. The strength of the U. S. economy and the record stock market are his major assets in the 2020 election.
It is difficult to understand why Meng Wanzhou’s appeal of her extradition is meandering interminably through our justice system. If, as some self-styled experts claim, she has a strong case, that could be a cathartic event for the bilateral relationship proving ironically that the rule of law is alive in Canada.
In a much less certain global trade environment, the best thing Canada could do is to strike definitively for internal free trade expanding on the initiatives announced recently by Premiers Jason Kenney and Brian Pallister and moving to full, unfettered free trade across Canada. That should include a generous phaseout of supply management, another form of managed trade that restricts access both internally and externally. If Canadian companies and producers cannot compete efficiently at home, how can they expect to compete in global trade? It is a matter of political will, one which, if implemented would also help staunch some of the regional discord.
Even more ominous than the trade friction between the U. S. and China is the extent to which China is overtaking the U. S. on the development of artificial intelligence. As Graham Allison contended recently in the National Review, “Beijing is not just trying to master AI, it is succeeding.” For those who have been confident that authoritarian governments are doomed to fail “AI offers a realistic possibility of upending this proposition. AI could give the Chinese Communist party a claim to advance a model of governance — a national operating system — superior to today’s dysfunctional democracies.” As Democratic presidential contender Pete Buttigieg put it, “China is using its technology for the perfection of dictatorship.”
On facial recognition, fintech, drones and 5G telecommunications China has, according to Allison, already become No. 1. A few pertinent facts:
❚ ❚ By 2018, China filed 2.5 times more patents on AI than the U.S.
❚ ❚ In 2019, China graduated three times as many computer scientists as the U.S.
❚ ❚ In last year’s international competition for facial recognition, Chinese teams captured the top five places.
In the facial recognition domain, the U. S. has essentially conceded the race primarily because of concerns over the average individual’s privacy and deep reservations about how this technology might be used in democratic societies.
China has no such compunction and is determined to win at any cost, and not just on AI or trade. That should be a wake- up call for America and its erstwhile allies. But, without firm leadership and a cohesive strategy, Western democracies will be on the back foot attempting to reverse a trend which authoritarian regimes, notably China, are determined and more readily able to dominate.
the agreement proved that the president ‘ talks loudly
but carries a small stick.’