Trade talks will probably end with tariffs still in place
LESS THAN a week after the White House described trade talks in Beijing as “candid and constructive”, American and Chinese negotiators met again on April 3rd in Washington, DC. There is talk of a summit between the two countries’ presidents. But amid the upbeat noises are a few discordant notes. Without a deadline, the discussions could drag on, or even stall. Although the contours of a deal seem clear, the final items are always the trickiest. And even if a deal is struck, it may not be a good one.
The two sides have already agreed on provisions relating to currency manipulation, and are hashing out how much more American goods the Chinese will commit to buying. Rules on technology transfer and American companies’ access to the Chinese market are still being discussed. Also on the table will be American demands that China relaxes its attitude to trade in data, which it sees as a threat to national security.
Some in the Trump administration see the negotiations as an opportunity to demand reforms that would also benefit China, such as a more stringent intellectual-property regime or trimmed subsidies. The main objective of the Chinese delegation, led by Liu He, a vice-premier, is simpler: the lifting of the tariffs imposed since last July, which currently cover just over 44% of Chinese exports to America, or goods worth $ 250bn in 2017.
According to Myron Brilliant of the US Chamber of Commerce, a lobby group, the talks starting on April 3rd focused on two of the thorniest topics. The first was which, if any, of the tariffs will be dropped upon reaching a deal. The Trump administration sees tariffs as leverage, useful to make sure that the Chinese stick to what is agreed. The second related to enforcement. The Americans want to be able to decide unilaterally if China has broken the terms of any deal and punish it with fresh tariffs, without risking retaliation. But that would be humiliating for the Chinese.
The Americans argue that such tough enforcement mechanisms are needed, given China’s history of failing to keep its promises. They think that only by offering tariff reductions for good behaviour, and threatening new tariffs for backsliding, can they ensure that the Chinese keep their side of the bargain. But the Americans may have to give some ground, since the Chinese also have grounds for mistrust. One of the reasons Mexican and Canadians agreed to rewrite their trade deal with America last year was the prospect of tariffs on steel and aluminium thereby being lifted. Months later, those tariffs are still in place.
Business lobbyists in Washington seem resigned to tariffs being phased out only gradually as agreed-upon milestones are passed. Recent evidence on the effects of the Trump administration’s tariffs imposed in 2018 suggests that Americans will pay the price. A study by Mary Amiti of the Federal Reserve Bank of New York, Stephen Redding of Princeton University and David Weinstein of Columbia University found that American importers were swallowing the cost of tariffs by paying higher prices (see chart), and that they were responding by importing a narrower range of products. Another study, by Pablo Fajgelbaum and Amit Khandelwal of the National Bureau of Economic Research, Pinelopi Goldberg of the World Bank and Patrick Kennedy of the University of California, Berkeley, found that although some American producers gained from weaker competition from imports, that was outweighed by losses to consumers and other producers, who had to pay more for inputs.
It seems unlikely that the Trump administration will be swayed by this evidence of collateral damage. Indeed, it may see buyers’ struggles to adjust to tariffs as evidence that they were too dependent on Chinese exports in the first place. Although a deal may see an easing of the tariff regime, from the administration’s perspective it has been too successful to abandon altogether. Americans had better get used to higher prices.
