Good news: It looks like a big win for China

The details are still a bit murky, but the new trade deal looks like a big win for China. And that’s means it’s a win for Americans (relative to continuing the trade war), but a loss for the Trump administration:

As described, the agreement does not address American concerns about China’s industrial subsidies and state-owned enterprises. There were no details on the currency provisions in the pact or how China will go about ensuring protections of American intellectual property. And there information about China’s plans to roll back its tariffs was murky.

I expected the Trump administration to lose, but not this badly. The US claimed they wanted China to become a more free market economy, but then demanded that their government step in and manage trade with the US, committing to buy an increased amount of US agricultural products. That’s the opposite of free trade.

Fortunately, it doesn’t make much difference. Commodities like soybeans are “fungible”, meaning there’s not much difference between the soybeans we export and those exported by Brazil. Agricultural commodities are traded in global markets, and thus re-shuffling who sends what to which countries won’t have much impact on overall farm prices, unless we can convince the Chinese to get much fatter, by eating more food.

Currency manipulation is a non-issue, as China’s current account is nearly balanced and it does not meet the Treasury Department’s official criteria for currency manipulation.

China always promises to crackdown on intellectual property rights, but there’s not much the central government can do to control the actions of 1.4 billion people. Fortunately, China is taking IP protection a bit more seriously in recent years, mostly because it now has lots of the world’s leading tech firms.

I find it amusing that Trump trumpets the farm sales as his big win. Thus his trade war “win” is to remove a problem that he himself created through an ill-advised trade war. But it won’t entirely fix the farm problem, as the continuation of US tariffs (at a slightly lower level) will continue to depress US exports, as will his reckless fiscal policies.

We’ve been told that we needed a tough guy like Trump to “stand up to China”, and now Trump’s caved into China like a dog backing off with its tail between its legs. When you combine this with the new Nafta, it’s clear that Trump has abandoned Steve Bannon’s vision of a muscular new industrial policy, and basically accepted that globalization is here to stay. That’s good!

Here’s Bloomberg:

Washington began this trade war with no clear idea of its objectives, how it would achieve them, or what sacrifices it was prepared to make. It’s now on the brink of a ceasefire that allows it to quit the field with a few shreds of dignity intact. It would have been far better had the battle never been joined.

That point deserves some fleshing out. Trump began with the (false) idea that China was taking advantage of the US, and that this explained our trade deficit. In fact, our deficit is caused by a shortfall of domestic saving, which Trump had no interest in addressing, and indeed has made even worse.

Trump needed a lot of foreign policy experts to help him deal with China, but these experts had a very different agenda. They wanted to weaken China, who they see as a threat to US hegemony. And this creates a dilemma. If we succeed in convincing China to become a freer and more open economy, then China will become much richer and more powerful. But our foreign policy establishment doesn’t want China to become richer and more powerful. It’s pretty hard to negotiate effectively if you don’t know what you want. So we ask for meaningless gestures like state-mandated agricultural purchases, instead of an open Chinese economy.

Of course we could stop trading with China, but that would immediately put the US into recession and lead to a Democratic president in 2020. So that’s not going to happen.

Trump is selling this as just “phase one”. He’d like to convince people that he’ll win a much better deal after the election. He won’t. This is as good as it gets. The phase one rhetoric is just a fig leaf to cover up the fact that Trump was beaten by the Chinese.

I hope all you commenters who claim I “just don’t understand” that we need right wing populist nationalists to help the working man in Ohio will now just shut up. Your man let you down, and it’s time to admit that your vision of mercantilism was always a chimera. If you want more blue-collar jobs, then reduce the trade deficit by reducing the budget deficit, as I have been recommending. Your guy is making the trade deficit worse.

PS. As new information comes out, I expect the deal to look even weaker, even more porous. This deal is intended for domestic consumption, not fixing actual economic problems. Recall when Trump asked Ukraine to investigate Biden. All he really asked for was a public declaration (on CNN News) that they would investigate Biden. Here he just seems to want China to say they’ll behave better in the future, without any reliable enforcement mechanism.

PPS. Over at Econlog I have some cheerier news for Trumpistas; the Conservative win in the UK makes it more likely that Trump will win again in 2020.


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33 Responses to “Good news: It looks like a big win for China”

  1. Gravatar of Bob Bob
    13. December 2019 at 11:26

    It’s a familiar Trump refrain: create a problem, claim to fix it then find a new problem to create.

    It’s the Trump Two-Step!

  2. Gravatar of sean sean
    13. December 2019 at 13:06

    This trade fight felt like we were fighting the last war. Excessive trade imbalances that mattered in 2007, but barely exists in 2019.

    For the most part China is already reforming. They are a big country and the economic models of japan/Germany to run big trade surpluses would never work for a rich country with 1.4 billion people. They were always destined to become a consumer economy as the only way for a country of that size to grow is domestic demand as the globe doesn’t have enough rich people to push demand for a country that size.

    China’s initial development leaned on Asian economic growth models. if they are going to continue to grow they will need to lean on US growth models that are based on huge domestic consumption.

  3. Gravatar of Dmitry Dmitry
    13. December 2019 at 13:51

    Good article, but I disagree that win of conservatives in the UK makes Trump reelection more likely. Johnson won because Corbin was weak in Brexit topic. It caused lot’s of Labor voters to turn to Liberal democrats as they were anti Brexit. That was fatal in the UK winner takes all system. In fact I think Trump is making mistake by thinking that Johnson is alike him – Johnson is adventurous but clever guy.

  4. Gravatar of Gene Frenkle Gene Frenkle
    13. December 2019 at 14:16

    I have never understood why Trump cares about intellectual property, why not let Bill Gates take the lead on that?

    The time to take on China was 2001 before all of the supply chains were firmly established. Plus it was obvious in 2001 that the oil market wasn’t going to be able to handle Chinese economic growth which is why the Bush administration was so obsessed with Iraq even before 9/11. So getting rid of Saddam and liberating Iraq’s oil was necessary for Chinese economic growth, but in 2001 Iraq still had sanctions that prevented investment in their oil industry. So in 2001 America actually had incentive to undermine Chinese economic growth due to the global energy situation…and sure enough America suffered an energy crisis under Bush.

  5. Gravatar of LC LC
    13. December 2019 at 14:34

    Scott:

    I am not sure the Chinese are looking at this as a victory. First, it’s not signed yet. Second, even if it’s signed, it’s not worth the piece of paper it’s signed on. (Just look at Mexico and the threats it took after USMCA.)

    Next year could be a repeat of the last 2 years: First quarter, declare Chinese are cheaters and US needs to get tough. Second quarter, slap on more tariffs. Third quarter, threaten to further escalate. Fourth quarter, declare victory. It might get more heated next year because of election.

  6. Gravatar of Christian List Christian List
    13. December 2019 at 14:36

    He won’t. This is as good as it gets. The phase one rhetoric is just a fig leaf to cover up the fact that Trump was beaten by the Chinese.

    Scott, that’s just a thesis that can be right or wrong. I’d even believe you, but where are arguments and evidence that support your thesis? You do know how to argue, right?

    Let me give you an example: It’s quite possible that Trump will start an even more aggressive phase two after the elections, first because it suits his type and second because he doesn’t have to fear re-election anymore. That makes him dangerous and unpredictable. He will have more leverage against China compared to now, because he doesn’t really have to fear elections anymore.

    That’s why the Chinese wanted a deal before the elections (as I and others had predicted), while you liked to say the Chinese weren’t in a hurry and could wait until after the elections.

    I hope all you commenters who claim I “just don’t understand” that we need right wing populist nationalists to help the workingman in Ohio will now just shut up.

    Have there ever been any serious commentators who have claimed something like this? If so, it was an extremely tiny minority. I can’t think of anyone right now. From my point of view you love to invent straw men that don’t really exist and then you declare “victory” over those straw men.

  7. Gravatar of LK Beland LK Beland
    13. December 2019 at 14:51

    “re-shuffling who sends what to which countries won’t have much impact on overall farm prices, unless we can convince the Chinese to get much fatter, by eating more food.”

    Don’t reason from a weight change.

    Convincing the Chinese to eat more food would have the same impact on overall farm prices, whether they got fatter or exercised more.

  8. Gravatar of Benjamin Cole Benjamin Cole
    13. December 2019 at 16:45

    As Scott Sumner says, the partial trade deal with China is murky and besides that no one will ever read the fine print or insure that any part of it is enforced.

    Reading the Afghanistan papers, and reading Scott Sumner, it appears the US enters into trade wars and military wars with no plans and no obtainable goals.

    If the US has a foreign policy anymore, I don’t know what it is.

    My best guess is that the US military has become a global guard service, sometimes wayward and fantastically expensive, for multinationals. US foreign policy is similar.

    Still, globalization is delivering lower living standards to the employee classes of developed nations. If we don’t see President Trump, then we will see Bernie Sanders in the White House.

  9. Gravatar of Benjamin Cole Benjamin Cole
    13. December 2019 at 17:14

    This is the lead to the NYT top story on Trump today. Evidently, the New York Times thinks the China deal is a win for Trump.

    “WASHINGTON — President Trump had plenty of good news to talk about on Friday, beginning with the news from across the Atlantic that a close ally, Prime Minister Boris Johnson of Britain, had just seen his party win a decisive majority in Parliament. There were also his accomplishments at home to promote: finishing the first phase of a trade deal with China, averting a government shutdown and moving forward with House Democrats on his signature North American trade pact.”

    —30—

    The New York Times does not mention an image of Trump with his tail between his legs.

    I don’t think this means that Scott Sumner is wrong in his latest post. I think in trade policy, as in macroeconomics, no one is ever really wrong.

  10. Gravatar of P Burgos P Burgos
    13. December 2019 at 19:10

    “If we succeed in convincing China to become a freer and more open economy, then China will become much richer and more powerful.”

    Doesn’t this mean that China (along with the US and the rest of the world), are the losers of this trade deal, and that the real winner is the “CCP first” faction led by Xi?

  11. Gravatar of Mike Sandifer Mike Sandifer
    13. December 2019 at 22:49

    Scott’s been right all along, just based on basic economic theory. The same is true of most economists. Stephen Roach has also had excellent commentary on these stupid trade wars.

  12. Gravatar of Christian List Christian List
    14. December 2019 at 02:32

    So on another note: what happened to all those pundits (and blogging economists with the name Scott?) who liked to claim that the British don’t really want Brexit? What happened? Did all these smart alecks suddenly become mute?

    What happened to: “people were so misinformed back then, so now that we have informed them *correctly*, the results will be different.” (Yeah, right).

    What happened to: “a minority might want Brexit, but even in that group most people want a really soft Brexit deal; so in other words, no real Brexit at all, except that the UK loses its European voting rights.

    But don’t worry: these “experts” will always pull new theories out of their asses, as long as they don’t have to leave their filter bubble.

  13. Gravatar of Larry Larry
    14. December 2019 at 05:38

    He gets impeached (in committee) and stocks rise, but not because he’ll soon be gone. The markets loved the tariff pause. They’ll be back later when he needs a new game to play. His view is “it’s working”!

  14. Gravatar of Michael Rulle Michael Rulle
    14. December 2019 at 08:03

    Well, you got him on this one. Congrats. He did have a belief, ill advised, that somehow we could do something better——and it was poorly defined. China is a complex problem as you outline it. My concern is when he wins he will go after them again more aggressively. My hope is he was smart enough to know when to “fold-em”. Now, I do not expect you to believe he is smart enough for anything—-that is your blind spot——but on China my 60/40 bet is he has backed off from a undefined and bad policy. But he will try to refocus on what is clearly a strategic challenge. Hopefully we are alive to know the answer. 🙂

  15. Gravatar of ssumner ssumner
    14. December 2019 at 09:22

    Christian, Only two comments today where you make up false statements about my views? Not bad.

    Burgos, I meant a win relative to the alternative, relative to Trump achieving his objectives. Yes, no trade war at all would have been better.

    Everyone, I said this:

    “As new information comes out, I expect the deal to look even weaker, even more porous.”

    Today the media is full of reports that the $50 billion in food purchases is merely a goal, not a hard and fast promise. Trump’s lies are so predictable that you can often figure out the truth merely by assuming the opposite of what he says.

  16. Gravatar of sd0000 sd0000
    14. December 2019 at 11:19

    Scott’s posts are really a vindication of Scott Alexander’s outgroups theory from “I Can Tolerate Anything Except the Outgroup”. Trump is part of Sumner’s outgroup – so anything that makes Trump (or the current U.S. Govt) look bad is a “win” for Scott (Sumner). Even though Xi and the Chinese government are far more authoritarian, anti-trade, etc. than Trump or the U.S., they are part of the “far group” and so Scott Sumner will cheer for them (and their wins) over the immediate “outgroup”.

    A Chinese Scott Sumner would take the same set of facts and call it a huge loss for Xi (since that would be *his* outgroup). But of course, China doesn’t allow a Chinese Scott Sumner to openly share his thoughts. And so you get the funny situation we currently have where both U.S. and Chinese cultural thought-leaders are rooting for China.

  17. Gravatar of Gene Frenkle Gene Frenkle
    14. December 2019 at 12:22

    sd0000,
    Trump is a con man that exaggerated the weakness of the economy in 2016 and ran on what amounted to the Michael Moore platform. The issues Trump highlighted were things Bruce Springsteen and Billy Joel sang about in the 1980s!?! The reality is the economy was strong in 2016 but Texas was in a mini recession due to low oil prices that also negatively impacted Rust Belt manufacturers. Trump needs “wins” on campaign promises even though it was obvious in early 2017 doing nothing would have been the better course of action. Trump’s supporters believe crazy things like Obama was born in Kenya and Hillary is responsible for murders and a “stand down order” was issued by either Obama or Hillary during Benghazi!?! So Trump’s supporters are impressionable and believe #fakenews reported by Fox News with respect to WMDs being found in Iraq, John Kerry betraying his country, and Hunter Biden being a criminal mastermind…so it makes perfect sense Trump supporters would believe Trump is helping them out when in reality it is all a big con job.

  18. Gravatar of ssumner ssumner
    14. December 2019 at 15:19

    sd2000, It’s a win for America, as I said in the post. And that’s good.

    It’s a win for China, as I said in the post. And that’s good.

    It’s a loss for Trump. And that’s good.

    I guess that’s too difficult for you to process.

    Gene, That’s basically correct.

  19. Gravatar of Brian Brian
    14. December 2019 at 16:30

    Christian how do you know the U.K. wants a real Brexit as contrasted with a soft Brexit? They were not offered a second referendum and instead they were offered a package of Corbyn (bigger government plus a second referendum).

    What I say is obvious so it must have occurred to you already.

  20. Gravatar of Brian Brian
    14. December 2019 at 16:37

    What they were offered was Boris who will probably do a soft Brexit.

  21. Gravatar of Benjamin Cole Benjamin Cole
    14. December 2019 at 17:47

    https://news.google.com/articles/CAIiENOPIHCUS3v4UdPTWVbtYukqGAgEKg8IACoHCAow-4fWBzD4z0gw_fCpBg?hl=en-US&gl=US&ceid=US%3Aen

    OT side note to anybody: The above is an article from the Financial Times. I like the article’s perpective because it talks about the global capital markets and global central banks.

    I agree with this perspective. We have globalized capital markets, money is a fungible commodity, and many central banks adding or subtracting from the money supply at any particular time. There are several big hoses and a few smaller hoses pouring into the water tank at any time, and some drains.

    So the obsession with the US Federal Reserve, in current context, is not really appropriate. We must also think about what the ECB, the Bank of Japan, The People’s Bank of China, and possibly the Swiss National Bank and the Bank of England are also doing.

    This perspective, however, raises serious questions about the Federal Reserve’s influece in the US economy.

    I think to inflate the US economic balloon, the FED must undertake to lower atmospheric pressures worldwide. A bit of a mountain to climb, no?

    My guess is that the US will eventually deploy helicopter drops, hopefully through domestic tax cuts.

  22. Gravatar of ssumner ssumner
    14. December 2019 at 23:03

    Ben, Your most recent comment reminds me of the answers that students would put on an exam when they hadn’t studied. Just string together some words and hope they mean something.

    Balloons, mountains, helicopters, atmospheric pressure . . . it all makes sense.

  23. Gravatar of Georg Georg
    15. December 2019 at 03:05

    >If you want more blue-collar jobs, than reduce the trade deficit by reducing the budget deficit, as I have been recommending. Your guy is making the trade deficit worse.

    How does reducing the budget deficit reduce the trade deficit? I think I understand why reducting the trade deficit would increase blue-collar jobs, but it’s not clear to me that it would be very good at doing that.

  24. Gravatar of Skeptical Skeptical
    15. December 2019 at 05:45

    Georg,

    Trade balance is a function of current account balance.

  25. Gravatar of anon/portly anon/portly
    15. December 2019 at 07:51

    sd2000:

    “Scott’s posts are really a vindication of Scott Alexander’s outgroups theory from “I Can Tolerate Anything Except the Outgroup”. Trump is part of Sumner’s outgroup – so anything that makes Trump (or the current U.S. Govt) look bad is a “win” for Scott (Sumner).”

    As SS himself has pointed out above, sd2000 is misunderstanding his point that this is a “win” for the US, since what Trump was trying to do had no possibility of being good for America.

    Also it’s very clear that SS’s criticism of Trump is not because Trump is a member of his “outgroup,” but is detailed, specific criticism of specific actions (e.g. lying) and policies (e.g. foolish trade policies) by a specific individual. You can of course respond to these criticisms by explaining where they’re wrong (e.g. “things which would we normally recognize as signs of bad character or judgement are actually part of a brilliant meta-strategy,” in turn e.g. “Trump is purposely doing dumb things to make them less popular and ‘inoculate’ US politics from these ideas for the foreseeable future”).

    However, just because the rest of his comment is a blizzard of misunderstanding the ideas of two Scotts, doesn’t mean that the first sentence is untrue:

    “Scott’s posts are really a vindication of Scott Alexander’s outgroups theory from “I Can Tolerate Anything Except the Outgroup”.

    Well, since much of what we observe in the world – and especially the blogging world – is a vindication of that, this may well be true. But what *is* the (or a) Sumnerian Outgroup (hereafter “SO”)?

    Anyone reading this blog for long would know that you can’t assign this based on the other Scott’s ur-example, the “blue” tribe’s attitude toward the “red” tribe. SS doesn’t belong to either the blue or red tribe. (It helps to remember that in criticizing Trump on trade, he’s criticizing ideas that in the past were much more closely associated with specific Democratic party politicians, e.g. Dick Gephardt, than with specific Republican party politicians; and if not closely associated with any non-crank economists on either the left or right, at least closely associated with one crank Democrat economist, Trump advisor Peter Bellamy).

    So what is the SO? I’m not really sure, but one thought that occurs to me is what I have always taken to be the outgroup of engineers. By “engineers” I don’t mean the people they call engineers nowadays who do coding and use software and aren’t (necessarily) really all that great at math, I mean the old-style guys (and occasional gals) who were really good at applying various forms of math to the real world. I always thought their outgroup was something like “people – especially other smart people – who can’t or won’t do math, or use math creatively.”

    But you can’t really say the SO outgroup is something like “people who don’t really understand monetary economics,” since that would be something like 99.99999999% of the population, and even something like 99.9% of the population of economists (many of whom, as I understand it, don’t even *want* to understand monetary economics). This doesn’t fit into the “outgroup” schema, this would just be misanthropy.

    Remember, this is one tough nut to crack. The Milwaukee Bucks are currently 24-3 with a +13.6 point differential, but despite being a fan, that just makes him less happy. (Technically he said it doesn’t make him happier, but of course we should assume that the probability of anything that we notice making our happiness exactly the same as before is zero, i.e. we should treat happiness as a continuous variable). So I would say the SO exists, but it may not ever be explicable to the rest of us.

  26. Gravatar of anon/portly anon/portly
    15. December 2019 at 08:01

    Of course then again one of the hallmarks of being a “liberaltarian” (or something like that) in the first place is that you’ve run into too many blue-tribers who want to rebut your points based on your (supposed) identity as a member of the red tribe and too many red-tribers who want to rebut your points based on your (supposed) identity as a member of the blue tribe. Hence a certain “allergic” reaction to outgroup-type thinking in the first place….

  27. Gravatar of ssumner ssumner
    15. December 2019 at 10:32

    Georg, The current account deficit is saving minus investment. Reducing the budget deficit tends to increase domestic saving. Bergsten and Gagnon estimate that each dollar of reduction in the deficit reduces the current account deficit by 52 cents.

    anon, Interesting, I’ll do a post on that.

  28. Gravatar of Why trade wars don't work – Econlib Why trade wars don't work - Econlib
    15. December 2019 at 11:28

    […] Yesterday, in a post on the “phase one” trade deal with China, I predicted: […]

  29. Gravatar of dtoh dtoh
    16. December 2019 at 02:32

    Scott,

    If I were Trump, I would sign a deal to keep the stock market buoyant and help my re-election chances, and then re-impose even stricter sanctions as soon as I got re-elected.

  30. Gravatar of P Burgos P Burgos
    16. December 2019 at 05:51

    @dtoh
    I can see the logic in your recommendation to Trump to sign a trade deal with China in order to boost the economy during his re-election campaign. I don’t think I understand reapplying sanctions immediately after winning re-election. What goal or aim is served by that kind of a policy? I don’t think that the sanctions weaken China geopolitically long term because then the Chinese just rely upon non-US tech and their economy is much more self sufficient. And if Trump is unwilling now to inflict harsh pain on the US economy in order to gain leverage over the CCP, why would he do so in the future. Remember that Trump is a lame duck president after he is re-elected; he cannot run for office again, so the parties future is in moving on to someone new, and Trump will only get as much Republican cooperation as he is able to help them win elections. Tanking the economy doesn’t help back benchers, so I wouldn’t expect them to go along with it.

  31. Gravatar of dtoh dtoh
    16. December 2019 at 07:14

    P Burgos

    1. Trump’s views on China predate his political ambitions by a lot.

    2. Without the need to get re-elected, he doesn’t need to worry about the economy.

    3. He can do everything by executive order without the support of back benchers.

    4. It’s not at all clear that sanctions will tank the US economy. (Supply chains and manufacturing can adjust very quickly these days.)

    5. Self-sufficient… maybe. Growing and robust….maybe not.

    And…. it would not surprise me to see Trump delay/cancel the trade deal one more time before the election because of [pick a reason that sounds good.]

  32. Gravatar of ssumner ssumner
    16. December 2019 at 09:23

    dtoh, You think in a second term he’ll achieve what he failed to achieve in his first term? Is that when we’ll see the 4% GDP growth? That’s not how things generally work. He’ll devote his second term to adding to his wealth. I’d add that the new Nafta is an indication that he’s either too stupid to understand what he’s doing or doesn’t care. (Probably both.)

    You said:

    “He can do everything by executive order without the support of back benchers.”

    Yes, because our Constitution is basically meaningless. It says Congress declares war, Congress sets tariff rates, etc.

    Sanctions that don’t hurt the US very much will also fail to hurt China very much. Our economies are equal size.

  33. Gravatar of dtoh dtoh
    16. December 2019 at 18:46

    > Yes, because our Constitution is basically meaningless. It says Congress declares war, Congress sets tariff rates, etc.

    No, because Congress through legislation delegated executive authority to the President.

    > Sanctions that don’t hurt the US very much will also fail to hurt China very much. Our economies are equal size.

    Equal size maybe but not equal sophistication and certainly not equal in ability to adjust rapidly. And in the U.S affluence and growth are not so nearly dependent on the export sector and the introduction of foreign technology.

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