Does The China Trade Deal Move The World Away From Free Trade?

Jan 18, 2020
Originally published on January 18, 2020 7:55 am

The "Phase 1" trade deal with China that President Trump signed this week is unlike any previous free trade agreement. From Trump's point of view, that's the whole point.

"We are righting the wrongs of the past," Trump said Wednesday during a White House signing ceremony, "and delivering a future of economic justice and security for American workers, farmers and families."

But by requiring China to buy specific amounts of goods from the U.S., the deal is raising concerns that it moves away from a free-market arrangement to a more managed style of trade.

Like earlier agreements, the 96-page deal does call for lowering some trade barriers in China. It opens a door for U.S. financial services, for example, and clears the way for China to buy more American beef, dairy products, and pet food.

But the agreement leaves many other trade barriers in place, including stiff tariffs on two-thirds of everything the U.S. buys from China. According to Oxford Economics, the average tariff on Chinese imports is now 19.3% — up from just 3% before the trade war began.

"It's kind of a hidden tax," said Angela Carr, whose Turbie Twist company imports popular hair towels from China. "Sometimes people, because it's called a tariff, I think are led to believe that perhaps China is paying for this, when in fact the cost is going to be carried by either the consumers, the retailers or the small businesses or all three."

The deal also aims to narrow the U.S. trade deficit with China by requiring that Beijing boost its purchases of U.S. goods and services by more than 50% over the next two years.

"What's to me very important, number one, they're going to be spending much more than $200 billion," Trump said. The agreement sets specific targets for China to purchase a long list of farm goods, manufactured products, energy and services.

"The only way for China to reach its commitments is to resort to Soviet-style managed trade," wrote Gary Hufbauer, a senior fellow at the Peterson Institute for International Economics, in a blog post.

Hufbauer called the purchase requirements a "worrisome and radical change," after decades in which both Republican and Democratic administrations called on China to act more like a market economy, allowing competition to drive purchasing decisions.

"It is a big reversal of how the U.S. has tried to do business for the last 40 or 50 years," Hufbauer said in an interview.

China sharply reduced its purchases of American farm goods during the trade war. The Phase 1 deal seeks to more than make up for that, boosting agricultural sales by $32 billion over the next two years, compared to 2017 levels.

Farmers enjoyed their best sales ever to China in 2012. But Darci Vetter, who was the chief agricultural trade negotiator for the U.S. during the Obama administration, said she never tried to set a numerical target.

"What U.S. farmers and ranchers told me they wanted was really the opportunity to form long-term relationships with partners in China and to do so on a market basis," Vetter said. "Trade is relationships. And we're not looking for selling a lot of products to China for the next two years. We're looking for a relationship that will endure."

Some observers are skeptical that China will actually buy as much from the U.S. as the agreement calls for. At the White House signing ceremony, Vice Premier Liu He said his country's purchases would increase naturally as a result of economic growth.

"As the living standard of the Chinese people rises, we will import fine-quality agricultural products from countries across the world," Liu said through an interpreter. He stressed that imports would be "based on the market demand in China."

If market demand is soft, China might have to scale back purchases from other countries in order to meet its pledge to buy more from the United States.

"Those countries will be very unhappy," Hufbauer said, "that China is essentially diverting its purchases which were based somewhat on market principles, to prefer U.S. exports."

Trump has no qualms about the prospect of displacing China's other trading partners, including U.S. allies such as Canada or the European Union.

"At long last, Americans have a government that puts them first," Trump said.

The EU warned this week that Europeans could bring a complaint to the World Trade Organization if the "Phase 1" deal puts them at an unfair disadvantage.

Trump's top trade negotiator, Robert Lighthizer, said the China deal doesn't violate WTO rules or compromise any other country's trading rights.

Like the president, Lighthizer prefers to negotiate with other countries one-on-one, rather than working through the international trading system that the U.S. helped to create.

"If you're the biggest economy in the world, you're far better off with bilateral agreements. You've got more leverage," Lighthizer said. "If you're Switzerland, you're better off working through a group and trying to get a coalition. If you're the United States, you don't need to."

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SCOTT SIMON, HOST:

The trade agreement known as phase one that President Trump signed with China this week is unlike any other free trade deal we've seen before. The president says that's the point.

(SOUNDBITE OF ARCHIVED RECORDING)

PRESIDENT DONALD TRUMP: We are righting the wrongs of the past and delivering a future of economic justice and security for American workers, farmers and families.

SIMON: The agreement does lower some trade barriers. But rather than simply encouraging free and open competition, the deal requires China to buy hundreds of billions of dollars' worth of goods and services from the United States.

NPR's Scott Horsley joins us to take a closer look at this agreement. Scott, thanks so much for being with us.

SCOTT HORSLEY, BYLINE: Good morning, Scott.

SIMON: What does make this deal so different than other agreements previous presidents have signed?

HORSLEY: Most trade deals in the past have been about knocking down barriers that other countries have put up around their markets so that American firms have a better chance of doing business there. And this deal does do some of that. It does try to pry open doors for U.S. cattle ranchers and dairy farmers to sell more to China, for example.

But more than just leveling the playing field, this deal actually requires China to buy an extra $200 billion worth of stuff from the U.S. over the next couple of years. Trump is hailing that as an "America First"-style win, but it's a sharp break from what the U.S. has advocated in the past. One critic likens it to the kind of heavy-handed managed trade we saw in the old Soviet Union.

Darci Vetter was an agricultural negotiator during the Obama administration. She says it's not what farmers want either.

DARCI VETTER: What U.S. farmers and ranchers told me they wanted was really the opportunity to form long-term relationships with partners in China and to do so on a market basis.

HORSLEY: Vetter says farmers don't just want to boost sales during an election year or the year after. They're making long-term investments and decisions, so they want to build relationships that will last.

SIMON: Scott, is China really going to buy an extra $200 billion worth of stuff from the United States?

HORSLEY: A lot of observers are skeptical. That would mean boosting exports by more than 50%. During the signing ceremony at the White House this week, China's vice premier suggested his country will only buy as much as it needs from the United States. Liu He is speaking here through an interpreter.

(SOUNDBITE OF ARCHIVED RECORDING)

LIU HE: (Through interpreter) As the living standards of the Chinese people rises, we will import fine-quality agricultural products from countries across the world, as the two sides have agreed, based on the market demand in China.

HORSLEY: So you've got this odd situation where China's talking about market demand, and the U.S. is imposing a kind of centrally planned shopping list.

SIMON: And I gather, Scott, some other countries have threatened to raise complaints about this deal with the World Trade Organization. Why are they unhappy?

HORSLEY: One way China could meet its purchase targets is by buying more from the U.S. and less from other countries. And not surprisingly, other countries don't like that. But Trade Representative Robert Lighthizer insists this deal doesn't run afoul of WTO rules.

Like the president, Lighthizer is not overly concerned about getting buy-in from the international community. He told reporters this week, if you're Switzerland, you're better off working through a group and trying to get a coalition. If you're the United States, you don't need to.

SIMON: Trade deals in the past have often focused on trying to bring down tariffs. This agreement leaves some big tariffs in place. What's the logic of that?

HORSLEY: Yeah. Trump says he wants those tariffs as a bargaining chip, both to prevent backsliding on this phase one agreement and to encourage negotiation of a second phase. The average U.S. tariff rate on Chinese imports now is more than 19%. That's compared to just 3% before this trade war started. And it's costly for American business owners, like Angela Carr of Pittsburgh. Her Turbie Twist company imports hair towels from China.

ANGELA CARR: It's kind of a hidden tax. Sometimes people, because it's called a tariff, I think, are led to believe that perhaps China is paying for this when, in fact, the cost is going to be carried by either the consumers, the retailers or the small businesses, or all three.

HORSLEY: Carr, who voted for Donald Trump back in 2016, says she's not too crazy about his trade policies. But for now, it looks like those tariffs are here to stay.

SIMON: NPR's Scott Horsley, thanks so much.

HORSLEY: You're welcome. Transcript provided by NPR, Copyright NPR.

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