BY DEREK SCISSORS
“Fact sheets” are public relations efforts. So it’s telling that the fact sheet for the US-China trade deal announced last week is not convincing — phase 1 is in fact a small deal. The twist: small is beautiful in this case. While Chinese concessions will almost surely fall short, the US didn’t give up leverage (as some wanted) and can respond either to meaningful progress by China or the lack.
That the Trump administration’s version of the deal is exaggerated is seen most simply in the balance of the two sides’ actions. All the US has acknowledged it will do, at least, is cancel planned tariffs and halve the rate on one block of existing tariffs. In exchange the PRC is supposed to both make very sizable purchases and change fundamental technology practices, where one of those would be a large step.
Unfortunately, neither looks entirely real. Take the American description of the pivotal matter of coerced technology transfer, “China has agreed to end its long-standing practice of forcing or pressuring foreign companies to transfer their technology to Chinese companies as a condition for obtaining market access.”
For obvious reasons, Beijing has never acknowledged this happens in the first place. Will final text include a Chinese admission of predatory behavior and end a wide range of practices? Or will it turn out to be yet another claim that the PRC has always prohibited technology coercion and will continue to, while “perfecting” its regulations. We’ve heard that one many times.
Technology transfer has always been, for good reasons, a crucial part of China’s development model. In many sectors Beijing is now looking for the most advanced technology available, the kind profit-seeking companies hold as closely as possible. It strains belief that, on account of a not-very-big tariff break, the PRC will stop pushing multinationals to share.
To illustrate how China can game this as they have other deals, consider “China further commits to refrain from directing or supporting outbound investments aimed at acquiring foreign technology pursuant to industrial plans that create distortion.” Beijing will tweak plans and say they don’t create distortion, then keep subsidizing outbound investment to acquire technology.
The second major issue is purchases: “commitments from China to import various U.S. goods and services over the next two years in a total amount that exceeds China’s annual level of imports for those goods and services in 2017 by no less than $200 billion.” Highly unlikely.
American goods and services exports to China in 2017 were $186 billion; they are on pace for $169 billion this year (while GDP is over $21 trillion). An additional $200 billion implies roughly $246 billion in US exports next year and $326 billion in 2021, using a constant growth rate. The fuss over whether agriculture exports can hit targets is not the main problem here.
Say farm exports hit the high end given by the administration, exceeding $40 billion in 2020 and touching $50 billion in 2021. That’s $40 billion or so combined over 2017. Where’s the other $160 billion coming from? The biggest American export to China in 2017 was aircraft, at $16.3 billion.
As of Monday morning, we only have partial answers to this question and those may be ugly. The deal has the PRC lowering barriers in financial services. In late October President Trump said terms, “take care of a lot of the banking needs” — it will be easier for American financials to invest. Beijing needs foreign money due to serious debt problems, in large amounts.
The administration could thus anticipate a huge expansion in financial services exports to China. Not so much crude oil, liquefied gas, and planes as American money bolstering the Chinese economy. A remote but even worse possibility: the previously floated idea of soaring semiconductor exports. In any case, it’s hard to see a plausible, positive path to $300 billion in 2021 exports.
That’s not so bad. Unlike the United States-Mexico-Canada trade treaty, the China agreement won’t be ratified by Congress and is best viewed as a memorandum of understanding. The US should use it to test Beijing’s intentions. Will American exports soar $200 billion and coercive technology practice halt – no. But clear progress on both fronts would be an excellent outcome.
In this light, complaints the deal doesn’t go far enough smack of preferring American capitulation. Sizable tariffs were applied barely six months ago; the PRC won’t undertake major change at the convenience of an increasingly shrill American investor class. The US can now wait to see how China’s deeds fit its words — a good position in an election year.
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