China trade deal won't be good for most Americans

President Donald Trump. Photo / AP

COMMENT:

President Donald Trump's phase one trade deal with China has been described as something between a "betrayal of American workers" and a welcome "new chapter in US-China relations" that will "create a better environment for US exporters and investors."

The fact that the first quote comes from Sen. Sherrod Brown, D-Ohio, a stalwart critic of unbalanced trade deals, and the second from the pro-business US Chamber of Commerce should give you a sense of who is perceived to win from the deal.

I suspect they're both right. From the perspective of working Americans who've been heretofore hurt by our trade policies, it's likely to be a bad deal, as it's mostly repackaging already-agreed-upon safeguards for US manufacturers and banks that want to offshore operations to China.

In a nod to workers and farmers, there are numerical targets for higher US exports, but I'm highly skeptical they'll be achieved, especially given the inadequate enforcement measures in the deal (see Chapter 7).

The deal says virtually nothing new about the key determinants of fairer trade: currency misalignment, labor and human rights, food and product safety, and environmental standards.

The stuff the Chamber is touting - heightened access to China for American banks and US investors, intellectual property protections - were already enacted by China. But whom do they help?

I've long argued that such measures only serve to "increase the incentives for companies in the United States to offshore more production and jobs, hurt American workers in tradable sectors and worsen our trade imbalance with China.

Since Hillary Clinton's 2016 presidential campaign, it's been clear to even centrist Democrats that what's good for multinational offshorers isn't always good for American workers."

Lori Wallach, the nation's premiere "trade-deal whisperer" (she knows better than anyone what these complex agreements are really saying) agrees, emailing me: "China already implemented some of the deal's investment and IP policies to entice more corporations to relocate production and jobs to China, along with new financial opening to attract more foreign capital to expand production in China and fund China 2025 acquisitions overseas."

No wonder the Chamber loves the deal.

But what about the added US$200 billion ($301.4b) in US exports that China agreed to purchase over the next two years? Well, for one, what happens after that? More worrisome is China's long history of fudging such deals. China's vice premier, Liu He, already said this part of the deal will be "based on the market demand in China." In other words, as is always the case, Beijing views such targets as much squishier than we do.

What happens when China fails to hit the target? There's no impartial, third-party arbiter to adjudicate the dispute, in part because the Trump administration has kneecapped this function at the World Trade Organisation (although, to be fair, the WTO's rules are woefully inadequate to discipline China's usual tactics, and it is institutionally incapable of quick, decisive action).

Instead, the deal sets up a new "Bilateral Evaluation and Dispute Resolution Office," as well as a process by which complaints to the office start with lower-level officials who can appeal the dispute up the chain to each country's top trade officials.

If the top dogs can't resolve the dispute, the parties "shall engage in expedited consultations on the response to the damages or losses incurred by the Complaining Party," i.e., they fight about tariffs. Sound familiar?

This sounds like a formula for China to do what they always do with such agreements: defer, delay, fudge. I expect China to quickly fail to hit its import targets, perhaps triggering a long, cumbersome talk-fest through the layers of the enforcement platform.

To be clear, I don't have a better idea for resolving these disputes, which is why I don't think such complexities are the way forward. A more impactful approach is to put in place rules to block currency misalignments - and here, the deal adds nothing.

Rather than a multilevel dispute system, what's needed is the nimble application of established benchmarks to assess whether a country is managing its currency to get a competitive advantage, and steps like those set out in this recent, bipartisan Senate proposal, to force realignment.

Forget squishy numerical targets and the inevitable disputes they engender. Focus on getting the prices right.

The fundamental question for the vast majority of Americans who are not looking to set up a corporate entity in China is whether this deal - or more broadly, the Trump administration's trade policy in general - helps them.

For our manufacturers, who were supposed to be the beneficiaries of all this, the answer is a hard no, and this deal, which leaves most of the tariffs in place, doesn't change that.

In fact, as I recently showed, even in our 3.5 per cent unemployment labor market, the manufacturing sector is flatlining at best. For all the Trump administration's crowing about their great economy, the pay of blue-collar factory is falling in real terms and has been for some time.

Wallach argues that "what's real in the deal is a new normal of what is effectively a surcharge - 25 per cent tariffs - on hundreds of billions in Chinese imports." That is, while these tariffs have already been in place, the deal might provide some competitive balance to American firms against China's pervasive subsidies by locking the tariffs in.

But none of that has worked so far (i.e., our deficit with China is down, but our overall trade deficit is unchanged as a share of GDP), and if my scenario about what I perceive as a fractious dispute process is correct, there's a lot more uncertainty to come.

A much better focus would be to forget the sweeping tariffs, export targets, corporate protections and byzantine dispute processes and make the necessary public investments in places, people and research and development to increase our international competitiveness. Let China assemble consumer electronics, while we make a strong play to gain comparative advantage in green technology.

It may take a few more phases to get there, and probably a new administration, but that's the path to a positive trade agenda that invests in America.

- Jared Bernstein, chief economist to former vice president Joe Biden, is a senior fellow at the Center on Budget and Policy Priorities.