The China Syndrome of Trade Deals

Last week I covered how President Trump managed to squeeze a bad deal for the US out of the UK with his trade war—a deal assuring US citizens pay about 8% more in US taxes on all goods purchased from the UK than they had to pay prior to Trump’s Trade Wars. That editorial can be found here:

The Trumpet Changes His Tune

David Haggith

May 9

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Having laid out what a bad deal looked like, I now have to lay out what a terrible deal Trump just managed to pound out of China. Even more than the UK deal, this one was a win where Trump can legitimately boast that he held China’s feet to the fire until he got them to agree to let us tax ourselves 30% on all the vast purchases we get from China! China acquiesced, and said, in compensation, they would agree to only tax their citizens 10% on everything they buy from the US.

So, the good news, on what is nothing more than another 90-day moratorium on securing an actual trade deal with China, is all of us in the US get to pay a LOT more than we ever used to for everything we get from China (which is the bulk of all that we buy) as a way of weening ourselves off buying so many China dolls and other things we are addicted to buying from China that we “don’t need,” which we did for decades because the price was once so low.

This deal is like drinking ipecac as a way to ween yourself off of using so much alcohol or adding it to your food to aid your diet, and calling that diet a victory so long as you keep the ipecac in your food for life. Yay! We get to buy a lot less and then digest having to pay a lot more for it.

Here’s the conservative take on Trump’s nuclear negotiation meltdown

We knew he needed a deal because everyone was saying, “Where are the deals,” which was making him mad enough to say “We don’t need a deal” though forging great deals was supposedly his strength. You don’t have to take my word for how bad this one was. Let’s look at what the newly and bigly Trump supporting media megalith, known as Fox News, has to say about Trump’s big deal with China:

While many on the right are taking bows after the U.S. agreed to a truce on trade talks with China, a prominent Fox Business reporter threw cold water on the idea that President Donald Trump has anything to celebrate.

Fox Business Senior Correspondent Charles Gasparino delivered a blunt analysis of the drastic temporary tariff reduction by the U.S. and China and the 90-day pause before any further escalation.

“Both sides blinked,” Gasparino wrote. He quickly followed up by adding, “I didn’t say we won.”

“Trump raised tariffs on the world, the markets, particularly the bond market — which we need to finance our debt–rebelled,” Gasparino wrote. “Trump then was forced to back off. End of story. Film at 11 of the president spinning this as a major victory. Ok sorry, I couldn’t help myself. But what we have seen is a little lesson on how markets exert their power, how when you have to depend on them as we still do (and remember it’s really the budget deficit thats causing the trade deficit and we need the budget deficit to maintain our standard of living) you can’t go to trade war with the world without bad stuff happening.”

What Trump won by imposing the most exorbitant tariffs in our lifetime was the ability to lower his own tariffs to merely exceedingly high levels with China and down to just high levels with the UK.

Gasparino continues,

We raised tariffs, and then China raised tariffs. We lowered tariffs, and then China lowered tariffs. Where is the win? I don't see it.

Exactly. Except that now we have higher tariffs all around than we had before we started the trade war. Or, as Bill Bonner put it,

This morning another big win was announced. NBC:

“The United States and China said Monday they had agreed to a 90-day pause on most of the tariffs they have imposed on each other since last month, in a major step toward easing a trade war between the two powers that has rattled the global economy. U.S. tariffs on Chinese imports will be cut to 30% from 145%, while China’s levies on U.S. imports will be cut to 10% from 125%, the two countries said in a joint statement.”

That’s right. Start a ‘Trade War.’ Then, back off…and a ‘Big Win’ for your team….

We won bigly because China agreed to let us stop smashing our foot with a sledge hammer. I don’t know how we managed to talk them into capitulating like that, but I think it was because Trump set a tough template for what they could expect via his exemplary deal with the UK.

The ‘deal’ cut with the UK was typical of the ‘wins’ won by the Trump Team generally. It leaves trade with the UK “worse than the pre-Trump status quo,” says Scott Lincicome, of the conservative Cato Institute.

Yes, conservatives, are saying the big win there was, as I wrote last week, that we are significantly worse off than we were before the Trump Trade Wars, but not as bad off as we were right after he started his trade wars.

As Bonner attempts to explain for those who cannot see why this is not a win …

Free trade is a feature of the win-win economy. It favors no one in particular and everyone in general. Prices go down and quality increases as people are allowed to compete for customers.

That’s what a win looks like. But the UK deal looked like this:

Trade managed by political hacks is another thing altogether. It is win-lose...or lose-lose, favoring the cronies...those with the best lobbyists...and the most political clout. Particular industries, investors, and/or consumers win...and everyone else loses.

And the China deal looks like that on steroids. So, thank God it is only another one of those Trump ninety-day reprieves that he grants whenever the economic and financial damage starts stacking up too high in the undefeatable US.

To some extent, US consumers will pay the new taxes. To the extent that they do not, US manufacturers will pay the new taxes. Take the automotive industry, as an example:

Last week, GM said levies could scrape as much as $5 billion from its profits this year, while Ford expects to take a $1.5 billion hit, The Associated Press reported.

Taxes on foreign parts, even after Trump has granted a lot of reprieves from his original disastrous high levels that effectively froze trade with China to reduce the damage he inflicted, will still cost American manufacturers considerably. This is what they are estimating after any price reductions they might hope to foist out of the foreign parts producers. From there, it remains to be seen how much they actually absorb by reducing their profits, as they say, or how much more they pass along to everyone who buys their products.

We already knew how this would end by experience

As Bonner writes, it is not as though we didn’t know where all this was going when we were first entering into the new wars:

The outcome of the ‘Trade War’ should have been obvious. It had been rehearsed, in public, back in Donald Trump’s first term. In 2017, he went to war with Canada and Mexico. He ranted and raved about the North American Free Trade Agreement, NAFTA, as if it were the devil’s own work, and declared a ‘trade war.’

Critics complained that he was an economic ignoramus...stupid...or even crazy. MAGA supporters defended him, saying it was just a negotiating tactic...or that he was ‘playing 3D chess,’ whatever that was.

And then, facing a total breakdown in America’s most important cross-border trade, Team Trump called off the war and settled down to negotiate. The result? Something that could have been the twin of the NAFTA, separated at birth, but now returned! USMCA took the place of NAFTA. And America’s trade deficit of $63 billion with Canada and Mexico in 2017 got worse, exploding to over $200 billion today.

No wonder Trump screamed this year about the bad deal we got with Canada, that some previous imbecile had negotiated for us. Our trade deficit became worse than ever under Trump’s USMCA. Time for a new trade war in order to re-even the playing field like the last one did.

Big win? Not exactly. He now says the USMCA — the deal made by his own trade honchos — is a rip-off for the USA.

I did point that out—that the trade situation that he labelled as a rip-off for America was the one he negotiated and praised at length.

Under the January, 2020, trade deal worked out between Trump and Chinese Vice Premier Liu He at the White House, both parties signed a "Phase One'' trade agreement that was much like this one in that it was only part of a deal and was basically as a trade armistice until the real deal could be worked out. It was intended to prevent that first trade war from escalating further. You can see how effective that was by where we are today. It even offered a road map for how we’d work out the details.

Under the weird Phase One trade deal …

"The strangest part," Bown says, was a provision that instructed China to buy an extra $200 billion of American-made stuff. That is, not only did China have to return to buying the amount of stuff it had bought before the trade war, it had to go above and beyond that. $200 billion above and beyond that. And it had to do so in two years; by the end of 2021. "We had never seen a trade agreement like that before," Bown says.

Now that it's 2022 — and China's deadline to buy boatloads of American-made stuff has passed — Bown recently crunched the numbers to see how much China ended up actually buying. "In the end," Bown says, "China actually bought none of the additional $200 billion of exports that it promised in the agreement."

So, that was effective. And yet …

… it's actually worse than that. While China did ramp up its purchases of U.S. agricultural products, when it comes to buying U.S. products and services overall, it still hasn't even returned to buying the amount of stuff it had bought from America before the trade war began.

From the beginning, Bown says, it was pretty clear that Trump's Phase One trade deal was unrealistic. By the time it was signed, the trade war had already been waged for almost two years. It had already done tons of damage to business relationships between the two nations. Plus, the often punishingly high tariffs on each side remained (and still remain) in effect. Phase One didn't end them. It just prevented them from going even higher.

That the deal was a real clinker should have been obvious by the fact that China agreed to buy quantities that were, in some cases, even greater than the entirety China uses.

Most recently, with the UK agreement, we went from lingering tariffs of 2% prior to the latest trade war to new tariffs of 10%, agreed in principle, but yet to be finalized. With China we are now agreeing to increase the tariffs we tax ourselves with to a new tariff rate of 30%, also yet to be finalized.

The other sweet thing about the new meltdown deal is that this time China has agreed to force its businesses and people to buy a lot more stuff from the US just like they agreed to last time. We don’t know the details, but perhaps again China will agree to buy more pork than all the people in China eat. would, like last time, either leave a lot of pigs rotting not the docks or require the centrally planned dictatorial state to force Chinese citizens to replace all the chicken they eat with pork on top of all the pork they eat.

So, way back then, I said there was clearly zero chance China would live up to such a bizarre deal and that it was just saying what it needed to say to end the escalation of the trade war, hoping someone else would wind up in charge of the US before it was forced into compliance. The results this time will be different, however, because this time China agrees to live up to a deal what will require them to buy a lot more stuff from the US.

Being so eager to fall for the same con, I’m thinking our president might not be the sharpest knife in the light-bulb drawer.

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