Getting the US-China deal over the finish line

Because President Trump has considerable authority to act on his own in the area of trade policy, making progress on outstanding trade-related issues might well present him with the clearest opportunity to influence the course of the U.S. economy this year and next — for good or for bad.

Successful outcomes to the three main outstanding trade issues — the negotiations with China, ratification and enactment of the U.S.-Mexico-Canada Agreement (USMCA) and a rollback of the U.S. tariffs on steel and aluminum — would go a long way to sustaining the economic expansion. Resolving these trade issues would help ensure a strong U.S. economy during Trump’s reelection effort.

{mosads}The challenge is that Trump can undercut the recovery if he does not conclude these existing trade issues or, even worse, if he renews his earlier efforts to erect trade barriers.

Stock market sell-offs following negative trade-related news appear to have impressed upon Trump the importance of settling these outstanding trade issues, but the harm of trade barriers goes beyond Wall Street.

Fears of a deepening of the trade war have abated since Trump’s “tariff man” proclamation last December, but these concerns likely were a key factor holding back GDP growth over the last quarter of 2018 and first three months of this year.

Recent statements from Treasury Secretary Steve Mnuchin and U.S. Trade Representative Robert Lighthizer that the U.S. and China are “getting close to the final round of concluding issues” hint at a successful conclusion to the acrimonious dispute between the world’s two largest economies.

The Trump administration’s objectives in persuading China to change its practices on intellectual property and its controls on inbound foreign investment are sensible and in line with long-standing U.S. policy.

Past administrations have attempted with limited success to get China to ensure protection of intellectual property and to stop requiring U.S. firms to hand over their secrets to future competitors in order to access the Chinese market.

President Trump’s approach that leads with tariffs rather than polite discussions is different to be sure, but the goals are both laudable and familiar.

There are good reasons to expect a deal beyond the positive chatter from negotiators. Trump seems to recognize now that positive news on trade can boost rather than hold back both markets and the economy; he understands that the stock market will swoon if talks with China blow up.

To be sure, pleasing investors is not the same as growing the economy, but the market swings in this instance signal prospects for business investment and consumer spending. The long-term benefits for the U.S. of a more open and rule-abiding China would easily outweigh the short-term costs of the trade barriers imposed as part of the negotiating process.

China equally has reasons to want a deal. The Chinese economy is not collapsing by any means, and China can implement additional policy stimulus to support growth. But the Chinese economy remains heavily dependent on exports, and U.S. tariffs have taken a toll.

Moreover, as China itself increasingly becomes an innovator, stronger protections for intellectual property will be in its own interest.

The remaining sticking points between the two nations seem bridgeable. On the U.S. side, President Trump wants to keep his first round of 25-percent tariffs on $50 billion worth of Chinese goods even after an agreement is reached, in part because the U.S. does not trust China to live up to the bargain. A natural compromise would be for these import duties to phase out over time with Chinese compliance.

China seeks to maintain its status as a developing country within the World Trade Organization, which gives them more flexibility to maintain some barriers. This position is out of step with the reality of China’s position as a massive player in global trade.

China’s per-capita GDP is still that of an emerging market country (albeit a successful one), but on trade they are a global leader. Here as well, a transition regime provides a natural compromise, with China forswearing developing-country status within some specified time period. For symmetry, this could be linked to U.S. compliance with the deal as well.

The Trump administration has a further incentive to move quickly on China to impart momentum to the effort to enact the legislation needed to implement USMCA. President Trump’s threat of a North American Free Trade Agreement withdrawal if Speaker Nancy Pelosi (D-Calif.) bottles up the USMCA would have a calamitous impact on the U.S. economy.

One can imagine that the prospect of a Trump-induced recession might be tempting to some Democratic candidates running to replace him, but the human cost of the recession would be steep, and the standing of Democratic leaders could suffer as well from being seen as standing in the way of an agreement.

The economic fallout from a NAFTA withdrawal would be even worse on Mexico, a prospect that could exacerbate other tensions such as crossings at the U.S. southern border. The politics are difficult, but the economic incentives point to moving forward with USMCA this year.

{mossecondads}Progress on the USMCA in turn would provide the Trump administration with a face-saving way to move away from tariffs on steel and aluminum that raise costs for many more American firms and likely cost far more jobs than they save or create.

Canada and Mexico naturally insist that these tariffs disappear as part of USMCA, and “acceding” to their quite reasonable demand would let the U.S. out of a self-imposed harmful economic situation.

Such progress would allow the U.S. to swerve away from threatened tariffs on imported cars that likewise would impose unnecessary costs on American businesses and consumers.

A successful conclusion to the U.S.-China trade negotiations at a Trump-Xi summit later in the spring could thus have positive impacts beyond those from the deal itself. Reports of progress in the U.S.-China trade negotiations thus provide welcome news for a U.S. economy that seems poised between expansion and slowdown.

Phillip L. Swagel is professor in International Economic Policy at the Maryland School of Public Policy.