Why a U.S.-China trade deal won’t change much

That is the topic of my latest Bloomberg column, here are some bits:

The trade talks are chaotic because a trade deal would be chaotic. By which I mean, it would be difficult to interpret and enforce, not unlike the present situation…

The basic problem is easy enough to state, though it is all but impossible to solve. Many of the U.S. objections to Chinese trade practices, regardless of their merits, are fundamental objections to how the Chinese economy is organized. They are more than mere complaints about easily monitored variables such as tariff rates.

…If a trade agreement is concluded, then, it is likely to have two parts: the parts that are easy to enforce, and the parts that aren’t. To the extent that the U.S. insists on greater Chinese compliance on the easier parts, a self-interested China will respond by shifting more trade onto the difficult-to-enforce parts of the agreement.

The tug of war will never cease. Trump will continue to tweet and move markets. The Chinese will continue to organize their economy to maximize state control. And maybe, over time, we will all recognize the broader truth: In a highly legalistic world, vague and hard-to define-strategies offer a competitive advantage.

Here is a new Reuters piece on how China already had started walking back many of its earlier commitments.

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I must not get it, because it seems to me that if China can simply define consistent and long term policies for their betterment, we could too?

Note that this is not a "trade war," this is uniform and stable tariffs set on all goods, and consistent rules on embedded IP in those imports.

I'd hate to think bad deal-making is not just an unfortunate status quo, but the normative economic goal.

+1, good post

Double good post.
This can be constructed as a unilateral import tax. The tax collection is easy, the two sides independently adjust import taxes will avoid all the complicated hassle of an agreement. Equilibrium, if reachable, is reached.

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Trump arbitrarily and irrationally imposed tariffs on some imports that either hurt US businesses or US consumers, orr both, with only rent-seekers profiting.

Eg, imposing tariffs on steel as a raw material hurt US nail factories because steel in nails shipped from Mexico made from the same steel paid no tariff. Ditto for tens of thousands of products.

The steel is imported, not because of China, but because Reagan et al refused to aid US steel makers in automating when Taiwan, Korea, were expanding their steel production as part of a national industrial policy. Many economists, including Milton Friedman, argued the US would benefit from what they saw as massive over production of steel because global demand could never double in a few decades give the US and Europe had peaked out on building capital assets witth steel, and substitutes were reducing demand for steel.

Later when China's industrial policy added far more steel capacity, the US steel industry was already primarily small minimills with no real foundry capacity and too small a market to carve out niche steel type value chains in the US. Note, much US steel production is foriegn owned, so foriegn owners are deciding where the high value add steel is produced, and its not the US.

Trump tariffs neither treats steel uniformly, high tariffs on raw steel, none on steel in finished goods, nor are they long term and thus going to drive long term investment.

Past administrations have used tariffs on steel, as an example, but dug into the market value chain and put tariffs largely on finished goods containing steel. Obviously not something done by tweet.

+1 If you want an historical perspective on the steel industry and how protectionism caused them not to innovate with the rest of the world, read "American Industry in International Competition: Government Policies and Corporate Strategies" ed. by Laura Tyson (Cambridge 1983) That's right, 1983 In the early 80's everyone recognized that because the industry did not change steel processes in the mid 60's when more efficient foreign capacity was coming on line, there would be problems. Solution: protectionism. A total failure, but at least our current Secretary of Commerce made a fortune rolling up steel companies and selling them to the Germans and Indians.

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The other truth coming to light besides his decade of losing money and dodging taxes, Trump is an incompetent dealmaker. His negotiations with Democrats, Canada, Mexico, UK, Germany, Australia, Japan, etc. are textbook disasters. Those are our allies. Iran makes no sense. Even Saudi Arabia and Israel seem to be winning at our expense. Communists like Xi and Kim are also better at this than a crony capitalist like Trump.

One wonders then, why we can't ask for others, perhaps in the economic community, to design a better national policy.

But perhaps in this day and age people would just call that "an appeal to authority," and we'd be back to square one.

And by the economic community I mean Galbraith. Can add Barkley Rosser too.

Both of them are complete failures, but their dads were famous. And that was good enough for Trump to be elected.

So let’s hire the Rosser Galbraith Un-Ambiguous Nepotism Duo to redesign our economy.

Another great moment in nothing matters anymore?

I can't argue with that, or apparently Tyler, if Trump is both what we have and the best we can hope for.

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So China is going to act in what they believe to be their best interest, more or less regardless of external agreements. E.g. systematic industrial espionage will continue.

It would seem the only real counter is to be willing and able to inflict enough negative feedback (tariffs, limitations on student visas, military sales to Taiwan, etc.) to shift the “best interest” calculus to a point that is perceived as “fair” and is acceptable to us.

This is the place where US IP law really does shine. US Customs seizes violating imports, and we have broader reach through international organizations such as:

https://en.m.wikipedia.org/wiki/International_Intellectual_Property_Alliance

The US intelligence services should be helping private companies lock down, as well.

I don't think we need to sweat the little things, like student visas.

Just throw more of their CEO's in jail like we did with Huawei. They violate the law, they pay the legal price.

+1

We need to stop being pussies.

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IP law does not shine very well, because it only works for extremely large revenue product lines as lawyers are so expensive. It also doesn't work against distributed attacks, like 30 copycats popping up on Ali Express and Amazon.

Finally, it doesn't work when China copies your software for its domestic market and never lets you sell there. Meanwhile, Chinese sellers can advertise on FB or sell their phones, etc.

Things sneak by on AliExpress and Amazon but both have an IP violation takedown process. They wouldn't if they didn't have to, but they have to because IP holders and their lawyers demand it.

And "copying software" is usually just writing your own software.

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The Chinese elite send their kids to the finest universities in the world, and they are right here in the US. Hit them where it hurts by kicking their kids out of the US. Let them think about that for awhile.

Since the Chinese are going to cheat, because according to Tyler they are structural cheaters, let's tax Chinese imports and/or block them altogether. The Chinese need us more than we need them. We can buy from someone else or bootstrap our own industries.

According to Tyler:

"The bilateral trade deficit is a measurable number, and setting a goal of reducing it gives China some incentives to reorganize their purchasing and order more U.S. goods. (Ironically, this very change would require China to increase state control over its economy, the opposite of America’s larger objective.)"

And what is that larger objective?

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So that is it: America must allow Red China to steal American jobs and drive American workers to a early grave.

OT: President Captain Bolsonaro has officially criticized drug use.

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The real question is:

Why negotiate with China?

Why not just publish a list of actions that are inconsistent with the terms of China's WTO membership, the penalty for each violation, and that the penalty will be lifted after 12 months of good faith adherence?

FTA:

"What about well-established rules like those of the World Trade Organization? They are not much help, either. No matter what happens, there will still be debates about just how much China’s policies are compatible with the letter or spirit of WTO rules. China’s trade practices have been going on since well before China joined the WTO, and the WTO adjudication process won’t settle matters. "

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Cowen is absolutely correct. What America's negotiators want is the ability to micromanage China's economy. That's not going to happen. China is a sovereign nation, a sovereignty that China vigorously protects, and a history of foreign dominance that China will not allow to happen again. Trump wants America to be great again, China wants China to be great again. Whatever the merits/weaknesses of the social and political conditions in China, China's form of state capitalism is doing quite well. Why would China agree to what would in effect be a regime change, the regime being the form of state capitalism that has delivered in spades. If I were on China's side of the negotiations, I might suspect that what America wants is to weaken China by changing China's form of state capitalism. Am I sympathetic to the complaints of America's business elite? Who does one believe created the China juggernaut? America's big business created it by shifting production to low cost China, never expecting that China would one day challenge America for dominance in markets. What did American big business expect? That China would be satisfied making smart phones, televisions, and Walmart household goods? So mush for big business.

Excellent! China is not like the USA. They are a different people, have a different economy, different morals, laws and expectations. A different currency and different system of gov't and money creating ability. China can easily smile and make nice on the surface. And then due to the secretive nature of their economy and money, sneak support to whatever industry their central command so desires at any point in time. Much stronger and more efficient IMO. But not the American or Western way. I would not bet against China's further success.

Couldn't we just fund research and development, at state colleges, in front of God and everyone?

Take tax money and donate it to college professors? To what end?

I love you for that "he said on the Internet" moment.

https://en.m.wikipedia.org/wiki/Berkeley_sockets

The invitation had a background of poppies at sunrise, and only an address in Lake Ontario with a time five twenty five. I picked Tom up from the airport, we listened to Highway 61 Revisited and analyzed the bourgeois elements of Nelson Rockefeller and Andrew Carnegie until he interrupted me, pointing out of his window at a marsh below, unzipping the backpack in his lap and pulling out a camera. What is it, Tom I said, repeating myself. As we got closer, I could see the sunlight refract off the water and a swirling trail emerge as if cut from a scythe. Pale fudge! I exclaimed, abruptly coming to a stop. I got out, as he labored with his camera, and jogged toward the trail, when I reached its edge, I looked back, Tom smiled waving and pointed his camera, then turned to a small tree covered with yellow leaves as it burst into hundreds of butterflies.

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Tyler's analysis is probably correct, and the logical conclusion is that there will be no agreement, although there may be a pretend agreement, in which China promises to stop industrial espionage, pirating etc. and the U.S. promises to reduce tariffs very very soon, in fact just as soon as China stops industrial espionage, pirating etc. We are in for a long struggle. In the words of Ghan-buri-ghan: "Big fight. And who will win?"

Not even the wise can see all ends.

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Is Tyler's point that the US should reduce tariffs and allow China to continue industrial espionage, pirating etc? If so why, other than as a sop to the Trade gods and those who profit from them?

It's just sour grapes. He’s always thought any trade deal is better than no deal, so risking no deal to improve the US outcome must be a bad decision. It turns out he was wrong. He’s got a lot of company.

+1

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"Why a U.S.-China trade deal won’t change much"

Well, this is all about working at the Margins, for a Marginal improvment, isn't it?

Are we for or against Marginal improvements?

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The Chinese may be drawing out the negotiations intentionally. Trump has an election next year. The economy is a definite bright spot for him. The Chinese might believe that in a year they could threaten some economic turmoil and that this threat will lead to a favorable resolution.

No one knows.

The Chicom economy needs US markets more than the US needs them (you can keep last year's smart phone or pay more). The dictator may save face and give Chiner a greater (than US) depression.

One thing for sure: Trade agreements don't work when one side - Chiner - acts in bad faith. Of course, Chiner deploys a fifth column in the US - elites, establishment GOP, and Dems - b/c Orange Man Bad! And, The Deplorable American is expendable. And, the elites were/are making $$$ billions on the status quo.

Clearly, the Chicoms aren't dealing with gutless scum and traitors to ordinary Americans like the Bushes, Clinton, Obama, anymore.

Maybe like the lunatic left, the Chicoms believe nutty Nancy Pelosi (who just now came out in support of Orange Man on this) that Trump will be gone ASAP.

Maybe the Chinese deep-down know they can't compete if there is a modicum of fairness to ordinary Americans - the elites on both side of the Pacific Ocean - made their $$$ billions and want to continue.

That's my story and I'm sticking with it.

'And, the elites were/are making $$$ billions on the status quo.'

Are the Waltons part of the American elite, or do they just get to make $$$ billions on the status quo without being gutless scum and traitors to ordinary Americans?

I did not qualify "elites." Walton didn't draft the current Chiner trade shit storm.

I have no problem Walmart buying low and selling low. Going forward, Walmart will need to adjust to the fair trade deal.

That being said, I love Walmart. I usually have six or eight inches less waste band size, cooler PJ's on, and more teeth than the red-neck, hillbilly next to me.

And, Walmart always has the lowest prices on (made in the USA) cartridges.

Not me, that's an impostor. But I do need lots of ammo, considering all the traitors I cull.

I am a God-fearing, peace-loving man.

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Dick the Butcher wrote:

"The Deplorable American is expendable. And, the elites were/are making $$$ billions on the status quo."

That is the bottom line.

Fortunately, the deplorables can vote.

As an aside, do the lefties still not understand how damaging Hillary's "deplorables" comment was?

Are they stupid or in denial or both?

We make '$$$ billions' no matter who we let be president. Honestly, is there any other way to see it?

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Cowen: "The Chinese will continue to organize their economy to maximize state control."

What's the evidence that China has been doing this?

Xi's attempt at expanding state owned enterprises (SOEs) is quite recent and hasn't been successful. Also, the number of listed SOEs has dropped from 15% in 2007 to 7% in 2017.

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I guess all the economists of the 90's who told us China would join the market system if we gave them WTO access were....wrong.

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Given the lags in economic responses If the Chinese want to damage the US economy going into the 2020 election the time to start is in 2019.

China can't damage the U.S. economy.

Sure it can - it is simply that the cost to the Chinese to do so brings them no conceivable reason to do it.

Which pretty much describes how WWI did not happen - until it did.

Any specifics with respect to how China could damage the U.S. economy in a non trivial way?

They could start selling Treasuries, although this fits into the "no conceivable (good) reason to do it" as it would harm them as well. AND, it's not assured that the harm done would any more than transitory (shout out to J Powell) but they might perceive it to be harmful and timing is everything in the treasury market.

That's just one issue. They could boycott or continue to boycott American agricultural goods. I'm just spitballing here, but they could buy up a bunch of oil and tighten world supplies thus driving oil prices higher. I'm sure there's other stuff I'm not thinking of...

Selling treasuries wouldn't do it and clockwork_prior said the inconceivable could happen just as with World War I.

Buying up oil? No, not close.

U.S. agriculture is a $1 trillion and ag exports to China are $25 billion. Next, please.

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China is already the worlds largest oil importer (~ 10 million barrels a day) and 2nd largest LNG importer.

China's strategic petroleum reserve (~ 500 million barrels) is estimated to be about full; by comparison, the US SPR is ~ 700 million barrels.

Their requirement for imported energy is an increasingly serious strategic weakness, and at least some of their belt and road work, which includes pipelines, as well as interest in the Middle East and increasing naval capacity, is likely a response to this. It also makes them, if anything, more sensitive to increasing price of oil than the US.

No, it is not a strategic weakness. Think this through - most political scientists and even some economists don't for some reason.

Fun fact: 20% of China's energy is from oil.

Their tanks and planes don't run on coal. In a superpower conflict, their inability to protect their trade would be catastrophic. How long would it take a major power to destroy the pipelines and mine their ports? A day? A week?

The same thing can't easily be done to Europe, Russia, or the US.

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"Their requirement for imported energy is an increasingly serious strategic weakness, and at least some of their belt and road work, which includes pipelines, as well as interest in the Middle East and increasing naval capacity, is likely a response to this."

Like Imperial Japan in the 1930s. The US was the biggest exporter of oil then, if I am not mistaken. It's deja vu all over again.

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There are lots of pressure points.

Perhaps the Philippines would agree to a 99 years lease to the US on a couple of the islands they claim in the Spratlys that we could develop into bases as China has done.

They have a million Muslims in prison camps. That might become a problem for their belt and road plans.

They produce considerably more CO2 than the US. Since it’s 12 years to the end of the world, surely people should be actively concerned?

"They have a million Muslims in prison camps. That might become a problem for their belt and road plans."

If you're positing there is anything such as Moslem solidarity, look at how Qatar treats Bangladeshi guest workers, and whether Israel's neighbors offer citizenship or visas to Palestinians:

https://www.theguardian.com/football/2017/sep/27/thousands-qatar-world-cup-workers-life-threatening-heat

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See Jagdish Baghwati's remarks on trade agreements: they are compendia of special-interest carve outs. No one understands them and no one understands any component of them but the lobbyists who cadged the carve-outs. So why is the moderator pretending he knows what he's talking about?

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Ending the reserve currency is the real goal. Everybody is playing this scam together. Trump organization doesn't like the US and frankly, I think by the 2000's began to hate it. This is a point nobody understands.

I am not too fond of the US either, but it started when I was about five.

As far as a reserve currency, any accurate currency works, they key being accuracy.

I think interest rates in the USA would rise dramatically if the US dollar ever was seen as the Turkish lira or Argentine peso is seen today.

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What if the Chinese economy is heading for some kind of very hard landing, but only insiders know that it's coming. Outside observers have cried wolf on this sort of thing too many times to count, but what if it's for real this time? Some kind of opaque issue hidden behind fudged economic figures and swept under the rug, but it's just become too big to keep up appearances anymore...

If that were true... a big if... then in that case, a sensible strategy for the Chinese leadership might be to provoke Trump into creating a trade war. Then the resulting hard times and austerity measures can be blamed on malicious foreigners, defusing internal unrest and providing cover to implement the tough structural reforms needed to fully transition away from an export-dependent economy.

I say, send them a few nuclear birds and let their bad times roll.

Yes! Kill them all!

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@Captain Slime - If you believe the stats, trade is too small a part of even China, between 14% (these days) to 30% (2006), depending on the year. But, it should be said that at the higher number, 30%, it's been pointed out the USSR fell due to two factors: the collapse in oil prices in 1985-6, and Gorbychev's teetotaler drive which restricted vodka sales. The USSR was making huge money from their taxpayers and the international market off of alcohol and oil, and once those two legs in the three-legged stool were kicked out (the third leg being military sales of hardware) their hard currency dried up, their budget deficit exploded, and the rest is history. Not sure about this "economic" view of history (I think politics and miscalculations in the Baltic states, Poland and Azerbaijan-Armenia played a role) but it's plausible. Will a trade war with the USA bring the end of the Chinese communist party? One can only hope.

Not IMO. Mainly because money itself will not limit the Chinese central command. It is too easy for them to show a smiley face and then undercut with subsidies without the West knowing. Or knowing soon enough to matter.

https://voxeu.org/article/chinas-hidden-shipbuilding-subsidies

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How much unemployment in China and slower growth could cause their bad debt situation to lead to a crisis?

I ask this because the #1 single fear of the ChiComs is losing power.

If they feel like they are getting into risky territory, they cave.

p.s. if you believe in free trade, you want them to cave. they should have already caved, but they are lead by mercantilists. US politicians and economists in the 90's and 2000's stupidly let China into the WTO without demanding a lot more change.

If you believe in free trade you should not care at all about whether or not your trading partner subsidises it exports or how they run their internal economy, just if what they are selling meets your requirements. The WTO is entirely unnecessary to a free trader.

Meh. This is based on a false impression of what free trade agreements are these days. The days of them being about getting rid of tariffs are long past - they're about coming to an agreement on regulation now. That is, it's become a question of whether you agree on common regulation that favors your country or the other country on a million little issues.

That's why the current dust-up is about China backing off from a promise to make laws reflecting agreed-upon points. Nobody believes the commitment is real without a legal instantiation of the regulatory promises.

This should be true for consumers. But if your job is eliminated as a result you will want to try and fight back. Thus we have Trump and Tariffs. Weak medicine IMO that will only make our patient sicker.

The tariffs are a tool to bring them around on the regulatory points. It's the willingness to accept tariffs that gives leverage in the negotiation. He doesn't want to end up with a system of tariffs, he wants to end up with a trade agreement negotiated from a position of strength rather than one where we just say "yes" to everything because any deal is better than no deal.

Remember when Cowen posted academic research on the Trans-Pacific Partnership and how the benefits went something like 4-1 for the rest of the world over the US? That's the bad outcome we're trying to avoid.

I don't think tariffs will solve our problem with China. For that we need to some how gang up and limit their imported resources.

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Gosh - mercantilism never dies I see. Who cares about "regulatory" changes. If the product fits your needs and is attractively priced - you buy it. If it doesn't you don't. I don't need a Government t Government deal to "help" me. Trade deals and tariffs are all about protecting some incumbents from competition. Any sensibly run country would simply say no thanks to any negotiations and let its citizens buy what they want from whomever they want. This is the best way to prosperity and wealth.

Fine, you can argue against it, but then don't go out there pulling for NAFTA and TPP because that's not what they're about. They aren't talking about what you're talking about.

Perhaps you should come up with different words to describe what you're advocating? Because co-opting existing ones only serves to add confusion.

First, consumers clearly care about regulatory changes. They've made a massive investment in regulation in this country, and they seem to want that extended to imports. Argue against it if you want (I would too), but to imagine it's not consensus is farcical. It would be a bit nuts if, say, domestic cars had to abide by safety and emissions rules and imports didn't.

But second, the consumer is only one part of the equation. The producers want to be able to sell in new markets too and sometimes to manufacture in new markets and sell here, and that requires cooperation and more specifically terms of trade.

If you want to regulate cars in your country you can do that unilaterally. Let's say you want all cars pink. Pass the law if you have popular support. Any foreign exporters then can decide if they want to supply you with pink cars or not. Their choice. If though they want to sell yellow cars to Sweden what business is that of yours?

And cooperation is simply another word for collusion. I.e. ripping off poor people for the benefit of established companies. Please read about the history of free trade, especially the Corn Laws. These were popular movements of the 19C where free trade was a populist movement, because they realised all these protectionist arguments were about enriching the rich.

Another point - if common standards are necessary to cooperate, why don't we let companies voluntarily decide if they want to adapt those standards instead of mandating them? I can assure you that people in business are perfectly capable of cooperating with a Government to Government agreement. They do this in myriad ways already.

Truth is that no country ever needs a government trade agreement, ever. We should fire everyone in that business and let private industry figure out what needs to be done to cooperate with any foreign company. Don't worry, they are clever enough.

Good luck with that.

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