TRADE WAR WIN MAY NOT AMOUNT TO A HILL OF SOYBEANS FOR U.S.
Enforcing any deal will be a big challenge in China economy,
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 U.S. 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 immune. Worries over the trade war’s impact on global growth have been a key headwind to the struggling oilpatch, 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 anti-competitive. For all this, it gets an end to the pain in return.
Some thorny structural issues — particularly regarding stateowned 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.