Now What? What The Trade Deal Really Means

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by Brian Maher

“Stocks were up and away this morning, aloft on happy wings. And as stocks went up… records came down. Both the Dow Jones and S&P established fresh highs today. Today is – after all – when the United States and China stowed their differences… and came formally to terms. President Trump and Chinese Vice Premier Liu He signed their names to a “phase one” trade accord late this morning.

What precisely did they pledge? AP draws the overall sketch: “Under the Phase 1 agreement, which the two sides reached in mid-December, the administration dropped plans to impose tariffs on an additional $160 billion in Chinese imports. And it halved, to 7.5%, existing tariffs on $110 billion of goods from China.

For its part, Beijing agreed to significantly increase its purchases of U.S. products. According to the Trump administration, China is to buy $40 billion a year in U.S. farm products – an ambitious goal for a country that has never imported more than $26 billion a year in U.S. agricultural products.”

Once the handshakes were over, the president seized a microphone and gushed: “Today we take a momentous step, one that has never been taken before with China, toward a future of fair and reciprocal trade with China. Together we are righting the wrongs of the past.”

And so there is more joy in heaven this day. But will there be more joy on Earth the next? We are not half so convinced. The wrongs of the past – if they be wrongs at all – may well remain wrong. The warring parties have signed a truce, it is true. But truce is not peace. Truce may be no more than a mere respite from arms, a temporary cessation of fire, a brief clearing of battlefield smoke.

Consider the terms of this truce… It cuts in half tariffs on certain Chinese wares from 15% to 7.5%. Yet tariffs on some $360 billion of Chinese exports stand in place. Perhaps two-thirds of Chinese goods remain under penalty. As do more than half of all United States shipments to China. Today’s signing scarcely budges them.

Meantime, this phase one armistice leaves unaddressed China’s war aims, its peace terms, its strategic objectives. Continues the AP wire: “The so-called Phase 1 pact does little to force China to make the major economic reforms – such as reducing unfair subsidies for its own companies – that the Trump administration sought when it started the trade war by imposing tariffs on Chinese imports in July 2018.

Most analysts say any meaningful resolution of the key U.S. allegation – that Beijing uses predatory tactics in its drive to supplant America’s technological supremacy – could require years of contentious talks. And skeptics say a satisfactory resolution may be next to impossible given China’s ambitions to become the global leader in such advanced technologies as driverless cars and artificial intelligence.”

Adds The New York Times: “The deal also does not address cybersecurity or China’s tight controls over how companies handle data and cloud computing. China rejected American demands to include promises to refrain from hacking American firms in the text, insisting it was not a trade issue.”

Affirms Eswar Prasad, who formerly directed the International Monetary Fund’s China desk: “The deal hardly addresses in any substantive way the fundamental sources of trade and economic tensions between the two sides, which will continue to fester.”

And so the generals remain huddled over their charts… the cannons are still loaded… and the troops are ready to answer the bugle. They only await orders from the commander in chief. Ultimate peace – lasting peace – will therefore require a “phase two” treaty… The president has vowed to tackle China’s multiple trade atrocities in phase two of negotiations. That is why he has held most existing tariffs in place. These represent the stick end of the “carrot and stick” polarity.

He will wield them as clubs, forcing Chinese concessions in this crucial second phase. But phase two must wait. The president has suggested – strongly – that negotiations may not proceed until this year’s election is decided. Assume they do proceed…

Will Mr. Trump club China into submission? Will China throw down its arms… and come marching into camp? Not if it means losing “face,” argues Jim Rickards: “Culturally, saving face may be more important to the Chinese. The Chinese are all about saving face and gaining face. That means they can walk away from a trade deal even if it damages them economically.”

Meantime, the truce, the uneasy truce, enters force. The Lord only knows if it holds… Below, Jim Rickards shows you why today’s truce “changes nothing,” and is vastly overshadowed by the emerging U.S.-China cold war. Read on.”

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By Jim Rickards

“Today’s big news is the signing of the “phase one” trade deal between the U.S. and China. A deal is certainly better than no deal. But the deeper issues behind the trade war are still irresolvable. Nothing has changed with today’s agreement. Unresolved issues include tariffs, subsidies, theft of intellectual property, forced transfer of technology, closed markets, unfair competition, cyber-espionage and more. Most of the issues will not be resolved quickly, if ever. In response to these well-publicized critiques, what has China said in its own defense?

China has showed no signs of a change in posture. In fact, China has begun digging in for a long struggle in which it rejects U.S. claims as an infringement of China’s “core interests.” The fact is, China cannot give up its theft of U.S. intellectual property because it depends on that theft to propel growth. This theft is essential to escape the middle income trap that afflicts developing economies.

China also rejects U.S. efforts to alter the behavior of China’s state-owned enterprises (SOEs) that compete in the private sector but are government owned, controlled and subsidized. These are integral to the Chinese economic model. And China cannot amend its internal laws to provide enforceability of any agreement because that involves a major loss of face.

Resolution involves intrusion into internal Chinese affairs both in the form of legal changes and enforcement mechanisms to ensure China lives up to its commitments. These legal and enforcement mechanisms are needed because China has lied about and reneged on its trade commitments for the past 25 years. The Chinese are infamous for playing for time. They offer some happy talk and vague promises, and negotiating partners such as the U.S. accept the offer in the hope that “this time it’s different.” It never is.

The Chinese are also notorious for saying one thing and doing another. They will gladly sign an agreement that calls for reductions in the theft of intellectual property and then turn around and keep up the thefts (perhaps with a more covert method). There’s no reason to believe China will be any more honest next time around without verification and enforcement. But China refuses to allow this kind of intrusion into their sovereignty.

On the other hand, the U.S. cannot accept Chinese assurances without verification that intrudes on Chinese sovereignty. For the Chinese, the U.S. approach recalls the Opium Wars (1839–1860) and the “Unequal Treaty” (1848–1950) whereby foreign powers (the U.K., the U.S., Japan, France, Germany and Russia) forced China into humiliating concessions of land, port access, tariffs and extraterritorial immunity.

China has now regained its lost economic and military strength and refuses to make similar concessions today. In order to break the impasse between protections the U.S. insists on and concessions China refuses to give.

This points to the fact that the “trade war” is not just a trade war but really part of a much broader confrontation between the U.S. and China that more closely resembles a new Cold War. This big-picture analysis has been outlined in a speech given by Vice President Mike Pence in October 2018 and a follow-up speech delivered on Oct. 24, 2019. Both speeches are available on the White House website.

Secretary of State Mike Pompeo has also added his voice to the hawks warning that China is a long-term threat to the U.S. and that business as usual will no longer protect U.S. national security.

The views of Pence and Pompeo, often captured under the heading of the Pence Doctrine, were neatly summarized by China expert Gordon G. Chang, author of The Coming Collapse of China, in a Wall Street Journal Op-Ed on Nov. 7, 2019, quoted below: “The Trump administration is heading for a fundamental break with the People’s Republic of China. The rupture, if it occurs, will upend almost a half century of Washington’s “engagement” policies. Twin speeches last month by Vice President Mike Pence and Secretary of State Mike Pompeo contained confrontational language rarely heard from senior American officials in public. “America will continue to seek a fundamental restructuring of our relationship with China,” the vice president said at a Wilson Center event on Oct. 24 as he detailed Chinaʼs disturbing behavior during the past year.”

Some argue the vice presidentʼs talk didnʼt differ substantively from his groundbreaking October 2018 speech, but these observers fail to see that in the face of Beijingʼs refusal to respond to American initiatives, Mr. Pence was patiently building the case for stern U.S. actions. Moreover, the vice presidentʼs thematic repetition was itself important. It suggested that the administrationʼs approach, first broadly articulated in the December 2017 National Security Strategy, had hardened. That document ditched the long-used “friend” and “partner” labels. Instead it called China – and its de facto ally Russia – “revisionist powers” and “rivals.”

At a Hudson Institute dinner, Mr. Pompeo spoke even more candidly: “It is no longer realistic to ignore the fundamental differences between our two systems and the impact those systems have on American national security.” Chinaʼs ruling elite, he said, belong to “a Marxist-Leninist party focused on struggle and international domination.” We know of Chinese hostility to the U.S., Mr. Pompeo pointed out, by listening to “the words of their leaders.”

The U.S.-China trade war is not the anomaly globalists portray. It’s not even that unusual viewed from a historical perspective. Retaliation from trading partners is all in the game. Free trade is a myth. It doesn’t exist outside classrooms. France subsidizes agriculture. The U.S. subsidizes electric vehicles. China subsidizes a long list of national champions with government contracts, cheap loans and currency manipulation. Every major economy subsidizes one or more sectors using fiscal and monetary tools and tariffs and nontariff barriers to trade.

But these issues are not just about trade. They must be seen as part of a new U.S.-China cold war with large geopolitical implications. It comes down to who will wield the most influence in the 21st century. So none of the big issues is any closer to a solution, and this state of affairs may last for years.

The U.S. will win the trade wars despite costs. China will lose the trade wars while maintaining advantages in intellectual property theft. Trade wars will continue for years, even decades, until China abandons communism or the U.S. concedes the high ground in global hegemony. Neither is likely soon. That’s why this trade war will not end soon, because it’s part of something bigger and much more difficult to resolve. This is a struggle for hegemony in the 21st century.”

- dailyreckoning.com