An imperfect US-China deal may be better than no deal at all

President Trump boosted hopes for peace in the U.S.-China trade war by announcing that a “Phase One” deal would be signed on January 15. Now both his supporters and his critics are anxious to see what the deal includes.

Details of the agreement have emerged slowly. Last October, the White House claimed that China agreed to significantly increase purchases of U.S. agricultural goods. China has also promised to relax limits on foreign investment in its financial sector, which would create opportunities for U.S. investment banks to enter a growing market.

In exchange, Trump slashed tariffs on $112 billion worth of Chinese imports, lowering duties from 15 to 7.5 percent. He also suspended tariffs previously slated to hit another $160 billion in Chinese goods. 

It all sounds like good news given the trade war’s costs. Judging by most traditional measures of economic health, the trade war has been a bad idea. Economic growth has slowed, consumers face higher prices and America’s exporters have suffered from retaliatory measures that restrict opportunities to sell. The agricultural sector was hit especially hard. 

At the same time, Trump’s tariff hikes have done little to accomplish Trump’s stated goals, which were to curb imports and narrow the trade deficit. The gap between America’s imports and exports was on pace to grow in 2019, not shrink.

From that point of view, any alleviation of trade tensions sounds like a good idea. Of course, there are several reasons to remain cautious. 

Some observers were quick to question the feasibility of some of the Trump administration’s boasts, including the claim that China would commit to purchasing $40 billion worth of US agricultural products. That’s double the amount purchased in 2017, the year before current tensions escalated.

At the same time, very little has been said about intellectual property protections. Theft of trade secrets was one of Trump’s primary justifications for his tough stance on China. And, while some hopes for reform emerged last November, there have been precious few details about what meaningful cooperation on intellectual property rights might look like.

Perhaps most importantly, China has remained tight-lipped about the deal. Trump’s critics have used Beijing’s silence to raise suspicions, casting doubt on any announcement from a White House with an established reputation for over-claiming on its trade policy successes.

In fairness to Trump, the impending deal is only “Phase One.” But a modest deal at this point may be better than no deal at all. The trouble with the trade war has been the uncertainty it introduces to the market. Investors and traders have been at pains to anticipate Trump’s next moves. At a minimum, January 15 may bring some stability to the situation.

Wall Street seemed to agree, enjoying significant gains in the first few days of 2020. 

While stock markets didn’t respond much during early stages of the trade war in the summer of 2018, performance has been rockier in 2019 as a direct result of the continued uncertainty. Now, a deal looks like good news for investors.

Whether good news for Wall Street means good news for Main Street remains to be seen.

Source: The Hill