With US-China Trade Pact Near, Economists Count Losses

Although the United States and China last week announced a tentative agreement to roll back some of the tariffs and counter-tariffs they have imposed on each other, in fact, the deal – if indeed it goes through – is likely a pyrrhic victory at best, with both sides damaged economically and crucially, the US’s already crumbling political and economic posture in Asia weakened if not globally.

The agreement has not yet been completed, and it could fail to materialize as it has in previous rounds of negotiations, especially with the chaos taking place in Washington, DC over attempts to impeach the president. But if a pact is reached, the Trump administration for the first time has apparently committed to removing some of the tariffs it has placed on US$360 billion worth of Chinese exports.

While the trade war has been droning on for the better part of two years, doing undeniable damage to both countries according to a November 5 paper by Alessandro Nicita, writing for the United Nations Conference on Trade and Development (UNCTAD), it has resulted in lost opportunities as well, including the US departure from the now-defunct Trans-Pacific Partnership, which has been superseded by the Comprehensive and Progressive Agreement for Trans-Pacific Partnership – much the same document without some worker protections and without the United States.

In addition, the Association of Southeast Asian Nations and its five larger partners, including China, are set to sign the Regional Cooperative Economic Partnership in 2020. With the US having backed away and moving toward protectionism, China’s influence is waxing as Washington’s wanes.

The United States has frozen itself out of both agreements, which together would have provided free trade access to a major segment of the world’s economies. The 15 prospective signatories to the RCEP account for a population of 2.1 billion people with a total gross domestic product by PPP of US$39.8 trillion. As to the CPTPP, the 11 signatory countries' combined economies represent 13.4 percent of global GDP, making it the third largest free trade area in the world by GDP after the North American Free Trade Agreement and the European Single Market.

Trump has indicated an interest in possibly rejoining the CPTPP if it were a "substantially better deal" for the US. The years of negotiation to produce the treaty’s successor, begun under US President George W Bush, were in fact tailored to suit US interests and the 11 signatories show little or no enthusiasm for accommodating Washington. So far, there has been no further development.

In the meantime, US Wheat Associates President Vince Peterson was quoted in US media as saying American wheat exporters could face an “imminent collapse” of their 53 percent market share in Japan due to the enactment of the CPTPP without American participation. Peterson added, “Our competitors in Australia and Canada will now benefit from those [CPTPP] provisions, as US farmers watch helplessly.” In addition, the National Cattlemen's Beef Association estimated that beef exports to Japan were also threatened by Australian exporter as a result of the ratification of the pact.

Some of those Japanese dislocations would be ameliorated with the first-phase agreement between the US and Japan, according to an October 3 analysis by the US Congressional Research Service, once again if and when it comes into force. It is expected to lower or reduce tariffs on US$7.2 billion of US farm exports, according to the US Trade Representative’s office.

But, according to the congressional research analysis, “In 2018, Japan ratified two major FTAs, which exclude the United States and which could have significant [negative] implications for US stakeholders.” The first is what in effect is TPP II (minus) US. The second is an agreement between the EU and Japan signed in February 2019. These two trading partners accounted for nearly 30 percent of US total trade in 2018. Once again, the US is shut out.

Certainly, it is obvious that both China and Japan have for decades maintained manifestly unfair trading practices vis-à-vis the United States that previous administrations have allowed to remain in place. Many of those trade restrictions, tariffs and non-tariff discriminations have been used against other trading partners like the European Union and a flock of lesser economies as well. But by going it alone rather than linking with a long list of the economically offended, Trump has clearly put the US at a disadvantage.

Alessandro Nicita, in the UNCTAD paper, has quantified what just about every reputable economist knew going in: that the trade war initiated with China has damaged the economies of both countries.

Titled “Trade and diversion Effects of United States and China,” the paper concludes that the results “point to the fact that the United States tariffs on China are economically hurting both countries. United States losses are largely related to the higher prices for consumers, while China’s losses are related to significant export losses. While this paper does not examine the impact of the most recent phase of the trade war, the results are likely to be similar in the sense that the recent escalation is likely to have added to the existing losses.”

Certainly, other reports bear that out. The tentative trade deal announced in October by the White House is scheduled to produce agricultural exports to China of US$20 billion. However, according to the US Department of Agriculture, farm exports already totaled US$26 billion in 2015, meaning US agriculture starts out at a level US$6 billion lower, not counting the losses from 18 months of interrupted exports plus lost opportunity costs from the fact that other countries, particularly Brazil, Australia and Canada have taken up the slack. The US will now have to fight to get those markets back.

In addition, although the US at Trump’s behest has so far provided US$29 billion in aid to agricultural interests to cushion the shock of the tariffs with further expected momentarily, that aid has caused economic dislocations in the US as subsidies necessarily do, and hasn’t necessarily flowed to the hardest-hit. As numerous news stories have pointed out, farm bankruptcies and suicides have skyrocketed.

Despite a US economy that now has been expanding for a record 121 months – the longest in history – the American Farm Bureau Federation noted that annual farm bankruptcies have nonetheless risen by 24 percent. Farm debt for 2019 is expected to hit US$416 billion, a record high. Agriculture industry suicide rates are 84.5 per 100,000 people, according to the Centers for Disease Control, the highest rate of any profession.

“Economists generally agree that increases in bilateral trade costs such as those resulting from the ongoing trade war between United States and China will result in lower trade, higher prices for consumers, and trade diversion effects,” Nicita wrote. “By using recent import data from the United States census bureau, this paper finds empirical evidence for these arguments.”

US tariffs on China have resulted in a decline in imports of tariffed products by about 25 percent in the first half of 2019. However, the economist found, “While substantial, this figure also shows the competitiveness of Chinese firms, which despite the substantial tariffs, were still able to maintain 75 percent of their exports to the United States” as Chinese exporters implemented efficiencies and chose lower profits in order to maintain their export positions.

Trade diversion effects for the first half of 2019 reached roughly US$21 billion, “implying that the amount of net trade losses corresponds to about US$14 billion.”

Taiwan, Mexico, the European Union, and Viet Nam have benefited at China’s expense. However, office machinery and communication equipment have been hit hardest, with a total reduction of US imports from China in the order of US$15 billion for the first half of 2019. Trade diversion effects in these sectors have been below average, “possibly because of lack of supply capacity outside China.”

While the paper doesn’t consider either the impact of Chinese tariffs on United States imports, “the qualitative results are most likely to be analogous: higher prices for Chinese consumers and losses for United States exporters.”

China’s export losses in the United States market have resulted in trade diversion effects, but only partly so. US imports from Taiwan, Mexico, the European Union and Vietnam among others, have all substantially increased because of the China tariffs with office machinery and communication equipment were the sectors most affected at the sectoral level. Trade diversion effects do not necessarily happen, and generally are not complete, meaning that third countries are generally able to capture only part of the trade, with the rest being lost or internalized by the country imposing the tariff.

Other countries may not have enough untapped supply capacity, exporters subject to tariffs may retain trade by reducing their prices; and trade frictions may make it very difficult to find other competitive suppliers, such as high transportation costs due to inadequate trade infrastructures.

Chinese exports to the United States started to decline soon after the imposition of tariffs, especially for those products covered under phase one. For the products covered under phase two, the effects started to be evident from the first quarter of 2019.

By comparison, UNCTAD reported, imports of goods not subject to tariffs have been relatively more stable and increased during Q2 2019. One possible reason for such an increase is United States importers stockpiling due to the possibility of additional tariffs on the remaining products (which indeed happened in September 2019). Another possible explanation is that Chinese exporters were trying to maintain profit margins by increasing exports in non-tariffed goods. Another possibility relates to mis-invoicing products to avoid the tariffs.

“While this paper does not examine the impact of the most recent phase of the trade war, the results are likely to be similar in the sense that the recent escalation is likely to have added to the existing losses,” Nikita concludes.

There are additional dangers besides direct damage from tariffs, and one of the biggest is that China, which previously has established "pillar industries" to lock out western imports, could cast a look at American products and decide to make them itself.

“The dangers of disruption for both sides of this technology-related escalation—part of a process that many in Washington see as ‘decoupling’—are substantial,” according to research published on June 24 by Robert Hormats for the Atlantic Council.

What it has done, according to Hormats, is to redirect Chinese priorities to reducing foreign dependence “even though experts estimate that it would take China several years to catch up and for the moment it needs them. In addition, major US technology exporters, many of which depend heavily on the Chinese market, will suffer damage as well from lost sales and perhaps in time permanent cutoffs of their links with growing Chinese companies which have been big buyers of their products.

In other words, the Chinese, forced to pay more for US manufactures – or being denied them all together – will start redirecting industry priorities to import substitution. The Chinese economy has grown big enough and sophisticated enough to be able to do that

“And what then will be the implications for US companies operating in China that require these semiconductors—or other US-originated products—for their own production?”

Other countries could see the escalation of such export restrictions by Washington as omens of the future—potential punishment for them in the event that their government, or a given company, ever had a dispute with the United States, raising the possibility that the US could choose similar export restrictions as leverage. That could well cause foreign companies to diversify away from dependence on US suppliers.