Pos­i­tive signs emerg­ing

Trade war win may not amount to a hill of soy­beans for U.S.

The Sun Times (Owen Sound) - - BUSINESS - JOE CHI­D­LEY

One could hardly call this week’s trade talks be­tween China and the United States a break­through, but the pos­i­tive signs emerg­ing from them were un­mis­tak­able. Ex­tended by an ex­tra 24 hours be­yond the planned two days in Bei­jing, the meet­ings prompted U.S. and Chi­nese of­fi­cials to prac­ti­cally gush about the head­way.

“Talks with China are go­ing very well!” tweeted Pres­i­dent Don­ald Trump in the wee hours of Tuesday morn­ing. “It’s been a good one for us,” beamed one U.S. of­fi­cial on Wednesday. A Chi­nese coun­ter­part echoed the sen­ti­ment, say­ing that “both sides are se­ri­ous about this con­sul­ta­tion.”

Well, it’s about time they got se­ri­ous. In­vestors have suf­fered a bru­tal few months amid jit­ters over trade wars, the global econ­omy and the im­pact on cor­po­rate earn­ings, and in the past few weeks the fear has turned into re­al­ity. Ap­ple’s sur­prise down­ward re­vi­sion to its quar­terly guid­ance sug­gested just how much the trade war is hurt­ing China — and there­fore the global econ­omy.

No econ­omy is an is­land (metaphor­i­cally speak­ing), and Canada has ob­vi­ously not been been im­mune. Wor­ries over the trade war’s im­pact on global growth have been a key head­wind to the strug­gling oil patch, a fact the Bank of Canada cited in its Jan­uary Mon­e­tary Pol­icy Re­port as an im­por­tant fac­tor in the “con­sid­er­able un­cer­tainty around the fu­ture path for global oil prices.”

Small won­der, then, that mar­kets have been feast­ing on the kib­ble of good news out of Bei­jing. West Texas in­ter­me­di­ate crude popped above US$50 on Wednesday, and global stock ex­changes sud­denly started to feel bet­ter about 2019.

Of course, there’s a big dif­fer­ence be­tween happy vibes and a real agree­ment. Time is short: the 90-day cease­fire in tar­iff es­ca­la­tion, agreed by Trump and China’s Xi Jin­ping at the G20 in Buenos Aires, ends on March 1. A lot could de­rail whatever progress was made in Bei­jing. But it’s also true that both sides have al­most ev­ery rea­son to seek a deal. With a govern­ment shut­down, for­eign pol­icy chaos, White House staff de­par­tures, a can­tan­ker­ous Demo­crat-led House and Robert Mueller on his plate, Trump can use all the nar­ra­tive-chang­ing ac­com­plish­ments he can get, and he’s clearly been rat­tled by the volatil­ity that’s gripped eq­uity mar­kets. As I’ve ar­gued be­fore, he can make a lot of the pain dis­ap­pear just by get­ting a deal with China.

China has al­ready made con­ces­sions. It’s agreed to restart soy­bean pur­chases from the States and to buy more Amer­i­can stuff in gen­eral. It’s agreed to end its 40-per-cent tar­iff on U.S. auto im­ports. It’s drafted new leg­is­la­tion gov­ern­ing for­eign in­vest­ment that in­cludes stronger pro­tec­tions for in­tel­lec­tual prop­erty and a ban on so-called forced tech­nol­ogy trans­fers. It’s re­port­edly agreed to in­crease mar­ket ac­cess and dial back its Made in China 2025 ini­tia­tive, which the U.S. ar­gues is an­ti­com­pet­i­tive. For all this, it gets an end to the pain in re­turn.

Some thorny struc­tural is­sues — par­tic­u­larly re­gard­ing state-owned en­ter­prises, which China hawks in the U.S. see as con­sti­tut­ing an un­fair trade prac­tice — ap­par­ently re­main, and they won’t be easy to re­solve to both par­ties’ sat­is­fac­tion. Yet with so much to be gained — both po­lit­i­cally and eco­nom­i­cally — from ending the trade war, there’s room for op­ti­mism.

Yet here’s the thing. Even if the trade war ends — an event that will un­doubt­edly be ac­com­pa­nied by claims of vic­tory from both sides — will the U.S. re­ally have got what it wants? Will it have any real ef­fect on what is ar­guably the world’s most im­por­tant trade re­la­tion­ship, or on the prospects for for­eign com­pa­nies in the world’s largest mar­ket? Will a deal, in the real world, amount to a hill of soy­beans?

Maybe not. En­force­ment of the terms of any agree­ment will be a big chal­lenge in an econ­omy as com­plex and rapidly evolv­ing as China’s. And some of the “con­ces­sions” don’t add up to much. For in­stance, the auto tar­iffs: most U.S. au­tomak­ers al­ready have plants in China, which is al­ready a huge mar­ket for them. As for forced tech­nol­ogy trans­fer and IP theft, there’s a fine line be­tween what’s forced and what’s a cost of do­ing busi­ness. Cen­tral govern­ment leg­is­la­tion might not do very much to ad­dress even the most egre­gious cases of IP theft, many of which oc­cur on the busi­ness-to-busi­ness level.

In any event, as a per­cent­age of GDP, China now spends al­most as much on re­search and devel­op­ment as the United States does; it grad­u­ates more than twice as many peo­ple from its uni­ver­si­ties as the U.S. does ev­ery year. To the ex­tent Chi­nese in­dus­try has been de­pen­dent on for­eign IP, it was and is be­com­ing less so. At best, any agree­ment on IP theft and forced tech­nol­ogy trans­fer might speed along a process al­ready un­der way.

Which is not a bad thing, of course. But you have to won­der about the costs of “suc­cess.” And let’s re­mem­ber the orig­i­nal ca­sus belli: the big U.S. trade-in-goods deficit with China, which Trump por­trayed as some kind of great evil. (It’s not, but any­way...) Through Oc­to­ber 2018, the last month for which fig­ures are avail­able, the U.S. goods deficit with China stood at more than US$344 bil­lion — nearly US$35 bil­lion higher than the same pe­riod in 2017, and on track for an all-time yearly high. Even if there’s an agree­ment that sees China buy more Amer­i­can goods, that num­ber is un­likely to come down sig­nif­i­cantly in fu­ture years — if only be­cause Amer­ica does not make a lot of stuff that China wants.

Trump once said that “trade wars are good, and easy to win.” By his own mea­sure, this is one he might have al­ready lost.

GETTY IM­AGES FILES

U.S. Pres­i­dent Don­ald Trump and China’s Pres­i­dent Xi Jin­ping shake hands dur­ing a busi­ness event at the Great Hall of the Peo­ple in Bei­jing in 2017.

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