Politics & Policy

Why We Should Avoid a Trillion-Dollar Deal with China

Police officers in front of a cargo container ship at a port in Qingdao, China, in 2018. (Stringer/Reuters)
Managed trade is a bad idea, and its terms are hard to enforce.

If a U.S.–China trade agreement is reached, get ready for an announcement of a Chinese commitment to purchase U.S. goods. The sums could be tantalizing, with figures of up to a trillion dollars mooted. But before any celebration, let me wave a warning flag: I encountered similar proposals for purchase agreements as commerce undersecretary in the George W. Bush administration, and there were sound reasons why these purchase agreements were consistently avoided.

First, they represent not a policy success, but a failure. Since the end of World War II, the United States has fought for a rules-based trading system to allow us to prosper alongside other like-minded participants around the globe. We have supported free-market economics and accepted the outcome as long as the process is fair. Trump’s approach represents a break with this policy; instead of free and fair trade, his goal is managed trade. But managed trade treats the symptoms of global economic malaise rather than the causes. In place of the traditional strategy of working for open, rules-based economies, it reduces the U.S. to using tariff power to hustle other nations.

Second, there are practical objections. There is no universally accepted measurement for these agreements. Are we discussing the posted rate for an item, or the actual sales price — common practice in industries such as aircraft? Are we discussing new purchases, or are we also adding in existing plans and commitments, partially double-counting? Are we looking at sales this year or a longer time-frame? And with products such as automobiles, do the dollar amounts refer to the ex-factory prices, the dealer’s prices, or the retail prices?

Say China announces the purchase of $400 billion in planes over the next five years, a handsome figure. Now say that in truth the agreement includes a 25 percent discount on the posted rate and China will be paying $300 billion for the planes. Before Trump’s trade wars, China had historically purchased $200 billion every five years, so the additional purchase is $100 billion, not a bad net increase. But it turns out that of that $100 billion in new purchases, $20 billion will be for new component manufacturing in China and $30 billion will go to other countries. So behind the $400 billion headline, there is only $50 billion in new business going to the U.S. $50 billion is still a nice win, but it doesn’t offset the damage done to the U.S. economy by the Trump tariffs.

Finally, there are the production and consumption aspects of a deal. At least some of the products in question have inelastic supply and demand. An additional supply of them won’t really raise consumption (think toothpaste) and/or additional demand for them would only slowly raise production (think minerals).

So China could commit to doubling soybean purchases over the next five years, but will Chinese demand for soybeans truly double, and will American farmers be able to double production in that time? The U.S. Department of Agriculture predicts that U.S. soybean production will take eight years just to return to pre-trade-war levels. Acreage will not double, so production would have to be shifted from other crops or supply taken away from the domestic market. There might be a net cost to the U.S. economy.

Same with a commitment to doubling aircraft purchases. Air traffic in China will not double in five years. Boeing projects annual growth at 6.2 percent. Even if the Chinese government shifts purchases from Airbus — a costly move — 100 percent growth would be hard to achieve. Boeing would not be able to double production in five years. The Boeing 777 might be the most sophisticated manufactured product in the U.S. The supply of trained machinists and aeronautical engineers will not double. And the manufacturing process will not allow for such a rapid spike in production.

The bottom line, then, is that any announcement of purchases from China might be based on bad policy, bad math, and bad economics, and thus doomed from the start. The opposite course — spurning a purchase offer and working with China to remove trade impediments, reduce tariffs, and open sectors to competition — is likely to produce more permanent results and induce other countries to move the same way. Trump seems to ignore a key rule in trade negotiations: Avoid agreements in which a trading partner’s ability to side-step commitments will exceed our ability to enforce those commitments. Here’s hoping he wakes up before it’s too late.

Frank Lavin served in the Reagan, Bush (41), and Bush (43) administrations, in the White House, State Department, and Commerce Department and on the National Security Council. His book, Home Front to Battlefront, is based on his father’s combat experience in Germany in World War II.

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