Half a cheer for Trump’s China trade deal

By signing a phase-one trade agreement with China, President Trump most likely has succeeded in preventing a crisis of his own making from spiraling out of control. At least now, in the run up to the November election, it seems highly unlikely that we will have an escalation in the U.S.-China trade war that has caused so much damage to the U.S. and world economies.

But it is far from clear whether this phase-one deal will have done anything to repair the damage from the punitive import tariffs imposed on China. This would appear to be especially the case since the administration is not planning to roll back the many restrictive import tariffs that will remain on China until after November’s U.S. presidential election.  

Even then, the administration is likely to do so only after determining that the Chinese government has fully complied with its obligations under the phase-one arrangement. Given China’s poor track record in addressing U.S. complaints about intellectual property theft and forced technology transfer, one should not hold one’s breath for a further de-escalation in the U.S.-China trade war next year. 

It is difficult to overstate the toll that the U.S.-China trade war has exacted on the U.S. and global economies.

U.S. investment has virtually stagnated at home as a result of heightened economic policy uncertainty and of fear about global supply chains getting disrupted. Meanwhile, in recent quarters the U.S. manufacturing sector has been in a troubling slump while overall U.S. economic growth has slowed to a disappointing pace.

In short, it would seem that the trade war with China has been an important factor in preventing the U.S. economy from harvesting the fruit of Trump’s large 2017 corporate tax cut and his bold efforts at economic deregulation. Long gone are the days when Trump’s promise to put the U.S. economy on a 3-4 percent growth path appeared even remotely plausible. Instead, we are now becoming accustomed to economic growth in the 2 percent range, which is little different from the growth rates experienced during the Obama years. 

If Trump’s tariffs on Chinese imports have not been good for U.S. economic growth, they have done little to close the U.S. trade deficit. Indeed, under Trump’s watch we have seen a 30 percent increase in the overall U.S. trade deficit despite his frequent resort to higher import tariffs. 

The negative effects of the U.S.-China trade war on the global economy have been even more pronounced than they have been on the United States. China, the world’s second largest economy, is now growing at its slowest pace in more than a decade, while Germany, the world’s third largest economy and a major exporter to China, is on the cusp of an economic recession. 

Now that Trump has secured a trade truce with China, one must hope that he does not extend his trade war to the European front. In particular, one must hope that he has drawn the right lessons from his unsuccessful trade war with China and that he will retract his threat to impose a 25 percent import tariff on European automobiles.

With the French, German, Italian and U.K. economies all showing troubling signs of weakness, the last thing that Europe needs now is a body blow from a more restrictive U.S. trade policy. Hopefully Trump’s economic team grasps how a further weakening of the European economy could have untoward spillover effects on the global economy that could reach our shores. 

Desmond Lachman is a resident fellow at the American Enterprise Institute. He was formerly a deputy director in the International Monetary Fund’s Policy Development and Review Department and the chief emerging market economic strategist at Salomon Smith Barney.