WASHINGTON, D.C. (Project Syndicate) — After nearly 18 months of tit-for-tat tariff increases, the United States and China have reached a “phase one” agreement to start de-escalating their trade war.
As part of the deal, President Donald Trump canceled further tariff increases on Chinese goods that had been scheduled to take effect on Dec. 15, and halved a 15% tariff on $120 billion worth of imports from China. As for China, it shelved its planned retaliatory measures and committed to import some $50 billion worth of U.S. agricultural products in each of the next two years.
But the promised de-escalation should not be overestimated. For starters, it is not clear how China could follow through on its import commitment without violating the World Trade Organization principle of nondiscrimination among trading partners. Moreover, the 25% U.S. tariff on $250 billion of Chinese imports remains in place, with further reductions linked to progress in future trade negotiations.
In fact, the current agreement addresses only some of the U.S. government’s trade-related complaints against China, and its remaining demands will be much more challenging to resolve. Broadly speaking, the U.S. wants the Chinese authorities to take steps to eliminate their country’s bilateral trade surplus with the U.S., end “currency manipulation,” cease intellectual-property (IP) theft, refrain from further forced technology transfer, halt subsidies to state-owned enterprises (SOEs), and stop acquisitions of U.S. companies through state-sponsored investment.
If this were a negotiation, one might sensibly ask what the Chinese authorities were seeking from the U.S. in exchange for its steps in these areas. But this isn’t a negotiation: the Trump administration is presenting China with a set of demands, which, if unmet, will result in “punishment.”
There are three major problems with the American demands. First, some of them are conceptually erroneous. Second, in a global trading system, bilateral action often results only in a rearrangement of trading partners. Third, it is not clear what the Chinese government could do to satisfy some of the U.S. demands.
For starters, the demand that China eliminate its bilateral trade surplus with the U.S. is misguided. There is no reason why merchandise trade balances should matter at all. For one thing, services trade is equally important. Exporting financial services is almost certainly more economically rewarding than exporting coal, for example. Moreover, some countries offer many more worthwhile investment opportunities than others. Citizens in countries with less attractive opportunities benefit from buying assets where the return is higher, and these investments are financed by current-account imbalances. Even then, bilateral balances are irrelevant. The current-account balance is the difference between domestic investment and domestic saving (in the private and public sectors), and the U.S. deficit is global: if one country reduces its surplus with America, the U.S. economy will simply adjust both imports and exports.