Trade Deal with China Is a Must. But What Will It Look Like?

March 8, 2019

The ongoing US trade war with China reached its latest milestone, as top officials recently concluded a week of trade negotiations in Washington. So much progress was made, according to President Trump, that he delayed the March 1st deadline for a new trade deal. However, if negotiators ultimately fail to agree, President Trump could follow through on his pledge to raise tariffs to 25 percent from 10 percent on $200 billion of Chinese imports into the United States. China would, of course, escalate its retaliatory tariffs. Fortunately, an all-out trade war is now a more distant scenario.

According to Treasury Secretary Steven Mnuchin, American and Chinese negotiators made headway on Beijing’s promises to end forced transfers of US technology, pull back on China’s industrial subsidies, and level the playing field between US and Chinese firms. US Trade Representative Robert Lighthizer noted that while progress had been made, “a few very big hurdles” remain before a long-term agreement can be reached. President Trump confirmed that he will “probably” meet Chinese President Xi Jinping at Mar-a-Lago this month.

During March, an interim agreement seems likely, leaving a complete agreement, and importantly implementation, as the subject of continued talks. With this time table in mind, what would a bilateral US-China trade agreement look like?

For starters, it’s doubtful the United States will instantly lift all its existing tariffs on China, but Trump is likely to lift a healthy token, either a small cut in the rate or a reduction in imports covered. The remaining tariffs will probably be staged to decline as China fulfills its side of the bargain. Meanwhile, we should expect China to concede ground when it comes to importing American products. News reports are already suggesting that China will commit to purchase $1.2 trillion of American merchandise over an unspecified time period.

In 2018, US merchandise exports to China were $111 billion, so if China doubled its purchases every year for the next five years—reaching $200 to $250 billion annually—Chinese imports would approach the mentioned target. Contrast that announcement with news from late last year, when Chinese officials unveiled retaliatory tariffs against $60 billion of US goods as a counter to President Trump’s new duties on Chinese goods. To achieve $200+ billion of merchandise imports from the United States, China would need to scrap its retaliatory tariffs and do a great deal more.

Additional US exports to China would be welcome, especially to the American agricultural sector hit hard by the expanding trade war. Depressed US agricultural exports to China threaten to leave a hole of $7 billion for American farmers this year. Soybean farmers have been hit especially hard, since China is the world’s largest soybean buyer. A surge in US agricultural exports should be an immediate payoff from an interim deal.

Second, any agreement—even a partial one—will place continued pressure on the Chinese when it comes to basic reforms. Chief among reform targets are continued American grievances concerning forced technology transfers. For years, China has avoided coming to grips with intellectual theft of American technology by Chinese firms. Chinese leaders, for example, have dismissed allegations of government-backed intellectual property theft on the sensitive F-35 fighter jet and a supersonic US undersea missile. Such denials can be read as excerpts from the playbook of spy craft. Equally troubling is widespread Chinese appropriation of purely commercial technology. With major business groups and lawmakers pressuring the Trump administration on intellectual property issues, this topic should be at the center of a new US-China agreement.

Along these lines, a new agreement should address the practice of Chinese state-owned enterprises receiving priority in the Chinese marketplace when competing with foreign firms. In extreme situations, state policy has precluded US businesses from the Chinese market altogether, shutting out American firms while their intellectual property is appropriated by Chinese counterparts through sleight-of-hand regulation.

Finding sensible solutions to US-China trade frictions is critical to the US economy. Trade is central to American manufacturers and American jobs, with more than 41 million American jobs engaged in trade of all kinds with all countries. Large and small firms alike benefit from healthy trade with China. Of the roughly 300,000 US companies that export worldwide, 98 percent are small and medium-sized businesses.

The deadline for new tariffs on China—in the event of a failed agreement—is not far off. An interim peace will be far better than renewed hostilities. A decade of accumulated grievances cannot be resolved in few months. But as US officials continue to work with their Chinese counterparts, uppermost is the importance of a deal to US manufacturers and farmers, the US financial markets, and the overall health of the American economy.