In China deal, managed trade wins

President Donald Trump undoubtedly thinks he “won” in the Phase One trade agreement with China. And from a certain perspective, he did.

However, the agreement is more of a step toward managed trade than free trade. It is not in service to any particular strategic view of how the United States should engage, or not engage, with China. And it illustrates the pressing need for Congress to take back control of the country’s tariff policies.

In managed trade, the goods that are sold across borders aren’t determined by the free choices of consumers in market economies. They are determined through agreements reached by political leaders.

Although the text of the Phase One agreement hasn’t been disclosed, from the Trump administration’s public comments, managed trade is at its heart.

The Trump administration backs off the imposition of new tariffs and eases some existing ones. China does likewise and agrees to buy more American exports. According to U.S. Trade Representative Robert Lighthizer there will be, in essence, quotas for additional China purchases of U.S. products in agriculture, manufacturing, services and energy.

So, Trump “wins.” China agrees to buy more American goods and Trump doesn’t agree to buy more Chinese goods. And Trump retains significant tariffs in place as leverage for Phase Two.

The agreement also reportedly includes provisions dealing with Chinese anti-competitive conduct, such as requiring technology transfers and manipulating its currency. And includes a commitment to open up its financial services market.

These provisions are undoubtedly mere ornaments to decorate the core deal: reduced tariffs in exchange for a commitment to buy more U.S. goods. China claims that it does not require technology transfers or manipulate its currency. (It does the former, but not the latter.) And it has promised to open up its financial services markets for some time now, without much movement.

Phase Two is supposed to get at the central problem with China in international trade: a system of state-controlled capitalism that is inherently protectionist and mercantilist. Under strongman Xi Jinping, maintaining and strengthening that system is a core value, and he has been an acclaimed autocrat for life.

Until internal forces compel a change, fundamental reform of the Chinese system isn’t in the offing. U.S. tariffs, irrespective of how high, won’t be enough leverage to get incumbent powers to essentially dismantle the comprehensive economic and societal control of the Communist Party.

Nor is there any reason to believe that is Trump’s objective in any case. Trump is a protectionist at heart, and occasionally offers paeans to the country’s protectionist past. He is a self-proclaimed Tariff Man, and has earned that title over the last two years.

Trump isn’t really interested in expanding the ability of U.S. companies to set up operations in other countries. He wants other countries to purchase more products produced in this country. He wants to promote U.S. exports, not foreign investment opportunities for U.S. businesses.

If Trump remains president, and if there is a Phase Two, it is likely to end the same as Phase One, with a managed trade agreement for the Chinese to purchase American exports, and no fundamental change in China’s state-controlled capitalism.

Managed trade, however, dodges the strategic question China, because of its size, poses for the United States. Until internal dynamics compel reform, what should be the nature of U.S. relations with China? A slightly smaller balance of trade deficit doesn’t fundamentally change the importance or complexity of this question. And the Trump administration shows no sign of attempting to grapple with it.

Trump wields tariffs, and the threat of tariffs, indiscriminately and casually. That disrupts global markets and complicates foreign relations. Trump does not distinguish between allies and adversaries while playing Tariff Man. The president, however, has no formal constitutional authority to levy tariffs. The regulation of international commerce is clearly assigned to Congress.

For most of the country’s history, Congress itself set tariffs, often after protracted and contentious debate. In the post-World War II era, Congress started delegating this authority to the executive branch. These days, a president has to follow certain procedures, and offer certain rationales. But at the end of the day, he can do pretty much anything he wants with respect to tariffs, as Trump has amply demonstrated.

This is not healthy, for the global economy, for foreign relations, for our constitutional order. Congress should take back its tariff authority.