TRUMP’S DEAL WITH CHINA WON’T CHANGE THINGS
So China and the United States have reached a limited agreement on trade — the first substantive thawing in an economic cold war that has consumed markets and CEOs and economists for 18 months. It’s a big deal. But let’s pause for a moment to think about washing machines. Yeah, washing machines. Back in January 2018, U.S. President Donald Trump declared war on the invading foreign hordes of mechanical cleaners of laundry. The rationale, as it always is, was to create jobs and protect domestic industry. And on the jobs front, it was a success. According to an April 2019 study by economists at the University of Chicago and the Federal Reserve Board, the tariffs stimulated the creation of about 1,800 American jobs.
But at what cost? The study estimated that while the U.S. government collected about US$88 million in tariffs, American consumers ended up paying an extra US$1.5 billion a year as a result of the tariffs. That’s because foreign manufacturers raised prices not only on washing machines, but also on dryers, which were not subject to the new taxes but which people tend to buy at the same time. (So why not charge more for them, too?) Just to keep up, domestic manufacturers raised their prices as well, and by about the same amount. In total, the economists figured that consumers shelled out US$815,000 for each one of those jobs the Trump tariffs created.
Other presidents before him, it should be noted, had slapped tariffs on washing machines, but the 2018 levies are important because they marked the beginning of the Trump era of protectionism, which has metastasized into a global tax-fest, hitting Canadian steel, European cheese and, of course, just about everything from China. Contained though it is, the washing-machine story provides a tidy study in trade lunacy. Not only does it put to lie the notion that foreigners pay for tariffs (which Trump keeps repeating anyway), and not only does it reveal some of the true costs when governments pick winners and losers; it also shows how unforeseen effects can arise when you distort markets.
Trump-style protectionism, its uncertainty and costs, is not done yet, as much as markets have cheered the interim agreement with China. Details remain scarce, but the rough outline is this: The U.S. reduces the tariff rate currently applied to most Chinese imports and cancels tariffs it had planned to slap on another US$150 billion worth of goods. In return, China opens up some markets, especially in financial services, and promises not to manipulate its currency. Also, China will up its purchases of U.S. agricultural goods, though by how much is still unclear — the Trump faction has been bandying about US$50-billion worth of goods annually as a target.
At least the deal is a step toward de-escalation. But it’s a long way from a comprehensive agreement that addresses the things the U.S. says it wants — namely, fundamental changes to China’s approach to state-owned enterprises, intellectual property and foreign investment. And there is little reason to believe a bigger deal is coming anytime soon. Tariffs are still in place, on both sides of the divide. And again, at what cost? Estimates of the burden on American consumers, from pass-through price hikes and from policy uncertainty, range wildly. I’ve seen anywhere from US$8 billion (the lower bound) to US$50 billion and up for 2018 alone.
The one “victory” for the U.S. in this deal is China’s agreement to buy a defined dollar value of more stuff from American farmers. Let’s leave aside the structural deficit here — wouldn’t it have been better to get China to agree to a permanent framework for agricultural market access? — and acknowledge that Chinese tariffs have hit U.S. farmers hard.
The Trump administration has earmarked US$16 billion in subsidies as compensation for trade-related losses (though some studies suggest the real damage is far less than that). Forcing the Chinese to buy goods from American farmers might also go some way toward rectifying the still-substantial U.S. trade-ingoods deficit with China, which was the putative point of Trump starting the war in the first place.
But there are problems. One is scale. That potential US$50 billion in farm goods represents nearly twice as much as China has ever bought from the United States, and it amounts to more than a third of its total agricultural imports in 2018. Plus, tariffs aren’t the only reason China hasn’t been buying U.S. farm goods: It is also grappling with an epidemic of African swine fever, which has killed millions of pigs. Demand for soybeans and corn, which are used in feed, is declining.
So if it intends to comply, and assuming U.S. farmers can even grow that much stuff, China will probably have to introduce some kind of subsidy to importers or do an outright government purchase. This is what the world has come to: at the request of the U.S., which says it wants to stop China’s government from intervening in its own economy, China will undertake a state intervention to support American farmers.
Basically, it’s a scheme to export subsidization. Even before 2018, the U.S. government was subsidizing its farmers to the tune of US$20 billion a year. It’s more likely that America’s subsidized farmers will ramp up production to meet the terms of the agreement; then, when it ends, as it will, they will be stuck once again in the familiar trap of overproduction; prices will plummet; the government will subsidize them even more than it does now.
Tariffs. Subsidies. Market distortions. It’s the same old spin cycle.