Managed trade: Centerpiece of US-China phase one deal
The new US-China agreement commits China to buy an additional $200 billion of US goods and services during 2020 and 2021, over its baseline purchases in 2017, which looks like something that many Americans can cheer. But conflicts between aspirations and achievements are almost inevitable.
Those 2017 purchases were about $130 billion of US merchandise exports and $50 billion of US service exports—implying a baseline of $360 billion over two years. Thus, the agreement commits China to ramp up its purchases to approximately $560 billion over the next two years—a whopping 55 percent increase. Naturally the Trump administration is pleased with this commitment, because without concrete targets, it claims the Chinese cannot be held to account.
But the only way for China to reach its commitments is to resort to Soviet-style managed trade— in other words, China promises to import a certain dollar or physical volumes of detailed goods and services, regardless of market prices or demand conditions. That’s the way the old Soviet Union conducted trade with its satellites for 40 years. Likewise, chapter 6 of the China deal contains a secret annex of product-by-product commitments, right out of the handbook of a planned economy.
Instead of principally relying on explicit reductions in Chinese tariff and nontariff barriers to boost US exports—only a few such reductions can be found in the agreement—quantitative targets are inscribed in the text. The targets are extremely ambitious, and it remains to be seen how and whether China fulfills them. For example, China could buy more soybeans or natural gas from the United States and cut back purchases of soybeans from Brazil or natural gas from other countries. Such a maneuver would violate international trade norms of giving equal treatment to trading partners based on price and quality and overall would have a negligible effect on changing China’s protectionist practices.
The Chinese commitment represents a worrisome and radical change in US policy and conveys a troubling message to the rest of the world. The US Trade Representative dipped its toe into managed trade with the US-Mexico-Canada Agreement, by setting complicated “rules of origin” and quotas governing the content of imported automobiles getting trade preferences. But the new US-China agreement is complete immersion. Price signals are out, quantitative commitments are in. Other countries that export to China—like Brazil, which has filled the breach on soybeans, and Canada, which is a potential supplier of crude oil—will ask whether new commitments to purchase US goods and services come at their expense. In the immediate aftermath, other countries may complain; over a longer period, they are likely to emulate.
The erosion of a market system of international trade is sure to cause distortions, lots of favoritism, and inevitable corruption. That was the experience of past US bouts of managed trade in textiles, apparel, steel, and other commodities back in the 1970s. The instant pleasure of an additional $200 billion of exports to China will likewise entail systemic costs.
To be sure, the rest of the new agreement consists of commendable rules on intellectual property rights, technology transfer, financial services, agricultural standards, and exchange rates, although some of these (at first glance) appear to underpin existing Chinese statutes or restate rules that already exist internationally. Putting the same rules in a bilateral agreement does provide extra leverage to ensure Chinese compliance. But the headline achievement of Trump’s highly touted trade deal—an extra $200 billion of US exports—is regrettably implemented by backward-looking managed trade targets.