Will A China Trade Deal Let These Tariffs Go?

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Will A China Trade Deal Let These Tariffs Go?

By Stephen Lamar, AAFA - 04/16/2019

As we approach the Passover season, a time associated with remembering and escaping past constraints, we are entertaining the very real prospect the United States and China could conclude a trade agreement to end the “hot” trade war that has been raging for the past year.

During Passover, we are encouraged to ask ourselves, “Why is this night different from all other nights?”

In the spirit of the holiday, we will no doubt be asking, “Why Is this trade agreement different from all other trade agreements?”

That is, of course, if there is a trade agreement. Much like the 10 plagues, which seemed to deliver the Jews to the brink of exodus several times before the Pharaoh’s hardening heart instead paved the way for another calamity, the news surrounding these talks have been, well, plagued with alternating upbeat assessments and dire warnings that “tough issues still need to be resolved.”

But the exodus finally did come, and the trade talks have a better than even chance of reaching a successful conclusion as well. But it won’t be divine intervention. The United States and China benefit from a mutually advanced trade partnership, with global value chains that employ tens of millions of U.S. and Chinese workers. This trade war has taken its toll on both sides of the Pacific, whether measured by the slowing Chinese economy, jittery stock markets, higher prices, or lost sales. Both governments are incentivized to strike a deal and to do it soon.

When these talks do reach a successful conclusion, there is no doubt that it will be marketed as different from all that have come before. After all, President Trump has been promising this, using words like “great” and “monumental” in his periodic tweets and comments. Does this just reflect the President’s flare for the dramatic, or is something unique really going on here?

It is most likely the latter, and here’s why.

For starters, the talks were launched in an unorthodox manner — namely through the imposition of tariffs and counter-tariffs. Many will argue that tariffs were unnecessary to launch the talks because there were talks already occurring at a reasonably high level. But the fact remains that no President in recent history, or ever, has resorted to these tactics and there is naturally now an expectation — especially among President Trump’s base — that this different launch will result in a different outcome.

Indeed, U.S./China bilateral trade policy is littered with past agreements that promised to reset the relationship both economically and politically but were then seen as failures to deliver on those mandates. Ambassador Lighthizer is fond of reciting this long list of past agreements, noting that many were not enforced or lacked enforcement mechanisms altogether. In this case, the yet-to-be concluded enforcement mechanism has been highlighted from the beginning as a central and defining element of this agreement.

There is no question that enforcement will continue to focus around tariffs. Although tariffs are often written into trade agreements as enforcement mechanisms, the United States seems to be pushing two concepts that are different. One would keep tariffs in place until China shows progress while the other would envision China surrendering its ability to retaliate if the United States decides to impose new tariffs. Both concessions would be game changers — if China were to agree to them — and both suggest that, even with an agreement in place, tariffs and the threat of tariffs will remain with us for a long time to come.  And this use of tariffs may outlast President Trump’s Administration because future presidents may find it difficult to contain the tariff genie now that it has been let out of the bottle. While President Trump may get credit for weaponizing tariffs, his successors may get credit for normalizing them.

This is fascinating because tariffs have caused grave damage throughout the United States. The United States has collected about $15 billion extra in tariffs paid by U.S. importers bringing in goods from China during the past 10 months, and this number grows by about $50 million per day. Many in Congress, and in the business community, have decried the use of tariffs, noting that U.S. tariffs are simply taxes that Americans pay while foreign taxes, especially on agricultural products such as cotton, hurt U.S. export markets.

But many of those same stakeholders have cheered on the President’s tough stance with respect to China — a stance that is closely anchored in the President’s fondness for tariffs. There now seems to be a growing acceptance that the use of tariffs may in the end be deemed “acceptable” if the resulting agreement is “worth it.” While this doesn’t make the use of tariffs any better, particularly in our industry which already pays some of the highest tariffs the United States charges, it does point to the political pressure the Administration is now feeling to return with a more meaningful agreement than what has been achieved in the past.

And certainly, some of the agreement’s potential deliverables, which suggest structural reform of the Chinese economy, may be very different from what’s come before. But with all these distinctions some things will not change. The scope is expected to cover many of the same issues that have been addressed in past deals — intellectual property rights, market access, services, agriculture, and so forth. It is also likely that, before the ink on the agreement is dry, politicians will start pointing their fingers at China again. Some of this may be an indirect attack on the President by his political opponents, seeking to pick apart a signature accomplishment as his re-election campaign ramps up.

But the comfortable trope of the past 20 years — especially when viewed through the lens of the trade deficit — remains firmly rooted in the view that China is cheating or taking advantage of the United States. Even the success of a “monumental” deal will take years to overcome that bias, and, in the meantime, U.S. politicians will be jockeying to showcase their own toughness by highlighting real or imagined Chinese transgressions and backsliding.

When the Jews escaped from Egypt, they wandered the desert for 40 years before they entered the Promised Land. Smart China watchers know that we likely also face many years before our U.S/China relationship — and the prospect of a tariff-free trade policy — can enter a promised land as well.

 

Stephen Lamar is Executive Vice President at the American Apparel & Footwear Association (AAFA). Steve is responsible for the design and execution of AAFA lobbying strategies on a series of issues covering trade, supply chains, and brand protection. In these roles, Steve also advises AAFA member companies on legislation and regulatory policies affecting the clothing and footwear industries. Steve is also President of the Washington International Trade Association (WITA), a non-profit, non-partisan organization dedicated to providing a neutral forum for discussion of international trade policy and related issues.