The Cost of Another US-China No-Deal Deal

October 15, 2019 6:00 PM
Photo Credit: 
REUTERS/Mike Blake

The US-China trade deal announced by President Donald Trump on October 11 was promoted as a "substantial phase 1" of a future agreement to address broader issues. But because this phase 1 has not been written or formalized, it does little to reduce uncertainties surrounding commercial relations between the world's two largest economies. Currently, US importers face average tariffs of 21 percent on goods from China while US exporters face average Chinese tariffs of 21.1 percent.

Renewed hope reflected in the markets and the expressions of administration officials that new talks would clarify the future relationship and reduce current tariff rates must still be seen as unfounded. Even the more modest goal of scaling down the conflict may not have been met. Already, China wants more talks to hammer out details while the United States continues to plan further tariff increases. As easily as Lucy pulls the football away before Charlie Brown can kick it, the US-China trade truce may evaporate into renewed recriminations, leaving US companies facing even more policy-induced risks about the international business environment.

Uncertainties about US-China relations were heightened, not lessened, by last Friday's ambiguous outcome. Even with the enormous emphasis President Trump places on restarting US agricultural exports to China, details about the pace of expected Chinese purchases of $40 billion to $50 billion of American farm products are murky. Nothing is on paper yet and China's state-run media have not announced the purchases. Also absent is the type of long-term agreement that American farmers need to justify and finance spring planting strategies.

Uncertainty also is raised by the Trump administration's insistence that previously threatened tariffs will be levied if no deal is reached quickly. On tap is an immediate increase to 30 percent from the 25 percent tariff already in place on $250 billion in US imports. Tariffs implemented on September 1, 2019, which taxed almost all imports of clothing and footwear from China, remain in place. And the United States is still sailing swiftly toward imposing another round of tariffs on December 15, when US imports of cell phones, laptops, and other computer devices will face 15 percent levies.

Signs that the Trump administration is pursuing the "decoupling" of Chinese and American technology supply chains continue to emerge. But the pace and scope of these policies, and their coordination with American allies, is unclear. On October 7, citing involvement in human rights abuses in Xinjiang, the administration added 28 additional Chinese companies to the "entities" list—effectively requiring all transactions between these firms and US companies to be preapproved by the US government. This action follows restrictions placed by the administration on US companies doing business with Huawei, some of which continue to sell to the Chinese telecommunication giant under temporary exemptions. It is widely believed that these waivers will not be renewed when they expire in mid-November 2019 and that the US offensive against Huawei will turn US allies to using the company's 5G equipment. Questions about how US trade partners in Asia and Europe will respond to these US blacklisting demands add yet more uncertainty for American businesses operating abroad.

The cost of trade war uncertainty is already showing up in US business investment. At PIIE's October Global Economic Prospects meeting, Karen Dynan provided evidence of a net negative contribution of business investment to US economic growth in 2019. Currently, consumers are maintaining the economy's steam, while US companies navigate an increasingly fraught and uncertain environment for sourcing and selling.

Over the long term, the cost of seemingly endless trade conflict may be outweighed by a loss of faith in America's ability to be a stable, reliable player in the global economy. US allies are watching and asking whether US deals can be trusted, whether markets rather than government agreements will determine trade flows, and whether American support for a rules-based trading system remains firm. On all fronts, US leadership looks increasingly unreliable, self-serving, and ineffective.