by Dan K. Eberhart
A trade deal with China appears within reach, but it’s unknown whether it will be the signature win for the United States that President Donald Trump claims. There are reasons to think it will end up as something less.
Trump deserves credit for standing up to the Chinese, whose decades of unfair trade policies and outright piracy of intellectual property warrant a tougher stance from the United States and Europe. We should applaud Trump for advancing the issue, and his feisty approach plays well with his base. The president has made some free-trade Republicans, and even some Democrats, realize that a firmer hand with Beijing is needed to protect American business interests.
But what concessions will the United States win from China if Trump and his Chinese counterpart, Xi Jinping, can hammer out a deal when they meet next, reportedly by the end of May during Trump’s expected meeting in Japan?
Actual deliverables may be modest and, with financial markets having already largely priced in a successful outcome over recent months, it’s dangerous to assume a deal will boost the market. The market could fall if a “buy the rumor, sell the news” trade mentality takes hold.
The president is unlikely to upend the economic world order with a trade deal with China. Any improvements for the U.S. side may be fleeting. China’s economic growth suffered in 2018 due to the trade war, but it rebounded nicely this year after Beijing implemented robust stimulus measures. Only a planned economy like China’s could adjust so quickly.
The truth is that an economic slowdown in China means a drop from a 6.5% to 5.5% annual growth rate, while a slowdown in the United States’ more mature economy — say, 3% to less than 2% — could hurt far worse.
China is no longer negotiating from a position of weakness, which means we should all set the bar relatively low on what to expect from a possible trade deal. The more protracted the negotiations, the stronger Beijing’s position becomes.
We can expect Beijing to accept some U.S. proposals to narrow the trade deficit, including possible commitments to buy large amounts of U.S. goods like pork, soybeans, and natural gas. Trump could frame this as a win even though it would cost China little. Beijing has been looking to diversify suppliers in several sectors, particularly energy imports, for some time. The irony is that such a deal would run counter to U.S. efforts to limit China’s role in our economy.
Some structural reforms may happen, but don’t expect rampant liberalization or significant progress on traditional trouble areas like technology and finance. China may reduce some barriers to trade and foreign investment, drop requirements that U.S. companies share technology secrets to gain market entry, or agree to enforce intellectual property rights.
But an air of uncertainty will continue to hang over the U.S.-China economic relationship, and there will be no big surge of pent-up investment by U.S. companies, because many of them have already found more attractive alternatives for investing in Asia, including in Vietnam and India.
A U.S.-China trade deal doesn’t necessarily mean an end to the trade war. Consider it more of a temporary cease-fire. Washington will need to keep some tariffs in place to ensure China lives up to its end of the bargain.
Enforcement will be essential, which means tariffs, perhaps at reduced levels, will stay in place on some products. That could mean more pain for U.S. farmers, manufacturers, and infrastructure companies, including oil services companies like my firm, Canary. Canary has been hurt by Trump’s tariffs on foreign steel and aluminum. In the second half of 2018 alone, Canary paid an extra $297,000 due to tariffs.
The additional costs consumed a significant portion of our savings from improved efficiencies and drove an increase in prices for our customers, since many of the products and raw materials that Canary imports are not readily available domestically. It also affected Canary’s cash flow, since tariffs must be paid immediately when an imported product arrives on U.S. soil. An additional $500,000 in tariff-related costs is likely to hurt Canary’s bottom line in the first half of 2019.
Perhaps one of the biggest uncertainties is the permanency of any trade agreement with China. An autocratically run China could run out the clock on Trump and return to its old tricks when a new administration assumes power in Washington. Would a future Democrat or even a traditional free-trade Republican president have the same boldness as Trump to take a tough stance with China?
If nothing else, Trump has shown that China can be leveraged and that Beijing’s unfair policies need not bully the rest of the world. Europe, for all its complaints about Trump, stands to benefit from the president’s stance on China and should support the U.S. side. Right now, though, Europe is not unified with the Trump administration on trade.
The final lesson may be that a single president alone cannot take on an autocratic China bent on stacking the deck against its economic competitors.
Dan K. Eberhart is CEO of Canary, LLC one of the largest independent oilfield services company in the United States.
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