Does anybody remember the “phase one” trade deal the Trump administration struck with China a little over a year ago? It’s still in effect, and it’s not turning out to be a very good deal.
Former President Trump and his trade negotiators inked the phase one deal on Jan. 15, 2020, after two years of trade hostilities marked by escalating tariffs on Chinese imports, and Chinese retaliation on U.S. exports to China. Under the deal, China was supposed to purchase at least $200 billion more in U.S. goods each year above 2017 levels, ramping up from year to year. That was supposed to narrow the U.S. trade deficit with China that had been surging since the early 2000s, a particular irritant to Trump.
But China hasn’t met its commitments, and President Joe Biden will have to figure out what to do about that. “One of the binds the Trump administration put them in with this deal is, what do you do?” says trade economist Chad Bown of the Peterson Institute for International Economics. “China has not gotten close to these commitments, and if you don’t resolve this it puts into question what does it even mean to sign a trade agreement with the United States?”
The phase-one deal didn’t cover all products and services traded between the two countries. Instead, the Trump administration pushed for China to buy more goods from U.S. sectors such as manufacturing, energy and agricultural products. The first-year targets China agreed to were based on a percentage increase compared with 2017, the last year before Trump kicked off the trade war with new tariffs on Chinese imports.
To meet the targets in the first year, China needed to purchase $159 billion worth of U.S. exports in the covered sectors in 2020. It only hit $94 billion, or 59% of the target, according to Peterson Institute calculations. China’s purchases fell short by $6 billion in farm products, $42 billion in manufactured goods and $17 billion in energy.
The coronavirus pandemic explains part of the shortfall, since it curtailed trade worldwide. Another factor was the grounding of Boeing’s 737 Max aircraft for safety reasons, since U.S. aircraft were one of the biggest categories of manufactured goods.
But other reasons for the shortfall in Chinese purchases illustrate the problems with government controls on trade. As tariffs rose on cars and car parts in both directions, manufacturers made adjustments. Tesla accelerated construction of a factory in China, to reduce U.S. exports subject to tariffs. BMW, Mercedes, General Motors and Ford did more sourcing for products sold in the Chinese market inside China, which also lowered tariff expenses. That led to more purchases of “domestic” products inside China, in lieu of American exports.
U.S. exports to China accelerated in the last three months of 2020, which research firm Panjiva attributed to the phase-one deal. “The surge in exports to China was largely the result of the Chinese government’s commitments made under the phase one trade deal,” Panjiva reported on Feb. 8. In December, U.S. exports to China in the covered categories fell just 5% short of the phase-one target, on a monthly basis. Chinese purchases of agricultural exports slightly exceeded the target. Energy purchases came close, while industrial exports to China remained far behind.
Biden hasn’t spelled out how he plans to approach China on trade, and his nominee for U.S. Trade Representative, Katherine Tai, hasn’t been confirmed yet or even had a confirmation hearing to explain her views. She’s a lawyer specializing in China who worked on trade issues in the Bush and Obama administrations, and for the Democratic majority on the House Ways and Means Committee. As an experienced policymaker who worked directly on Trump trade issues while in Congress, she won’t face a steep learning curve.
Biden has called for trade policy that does more to protect and promote American jobs. He has said the United States should confront Chinese trade abuses with allies, to build leverage, instead of going it alone as Trump did. It seems likely he’ll keep Trump’s China tariffs in place for a while, at least, perhaps offering to remove them only if China agrees to certain concessions. But there’s no evidence Trump’s tariff strategy produced any additional U.S. jobs, and it may even have cost some jobs by driving up materials costs for hundreds of U.S. manufacturers buying tariffed products that suddenly rose in price.
Biden gave one hint of his differences with Trump when the Justice Department indicated on Feb. 10 it would likely abandon the forced sale of social-media app TikTok, which is owned by a Chinese firm, ByteDance. Trump had claimed TikTok posed national security concerns, justifying the unusual divestment demand. But many critics felt it was an extralegal and arbitrary grab for leverage by Trump, perhaps because his trade tactics weren’t working as he hoped. Biden’s move seems to signal he’ll revert to a more diplomatic approach.
There’s supposed to be a six-month review of the trade deal this month, but without a confirmed Trade Representative, the Biden administration can’t really provide substantive analysis. So Biden will probably defer a serious review until later this year. “You can’t just let it slide,” says Bown. “They have a lot to figure out that has been dumped in their laps from the last four years.“
Rick Newman is the author of four books, including “Rebounders: How Winners Pivot from Setback to Success.” Follow him on Twitter: @rickjnewman. You can also send confidential tips, and click here to get Rick’s stories by email.