If you’re making certain business and investment decisions with the hopes and expectations of a U.S.-China trade agreement, I would urge you to curb our enthusiasm as follows:
1. We have never had a “trade agreement” with China. It’s not like NAFTA, where we have to replace a prior trade agreement. The “agreement” is this: If you stop violating international laws and accepted global trade practices, and you can regain access to our market, without tariffs.
It’s no different than the trade agreement offered for the past year, which China has refused. We won’t be executing any “trade agreement” as you know one- meaning, a preferential or free trade agreement between or among parties in order to reduce (or eliminate) tariffs, quotas, and other trade restrictions on items traded between the signatories; where both, or multiple countries, loosen their trade restrictions to help out businesses so that they can prosper better between the different countries. Under this definition, no bilateral, mutual, trade agreement will happen- at least not anytime soon.
Any trade understanding (or agreement to try to agree someday) between the parties will be a list of terms and requirements of China in order for it get U.S. market access, sans tariffs- which may include immediate removal of tariffs on U.S. goods and purchases of more U.S. products. It will be a unilateral obligation- not a “trade agreement”.
2. The term “trade war” over-simplifies this dispute. This dispute’s inceptions was not one nation’s implementation of tariffs and barriers, or the use of subsidies or dumping, to protect a market or industry, followed by another nation’s similar response. China has been operating in an unacceptable manner in contravention of global practices and acceptable legal and commercial standards for many ways. China’s practices are not just to protect a product or an industry, but the use of a mercantile approach, and illegal activity, and oppressive terms, to gain global power, to which the U.S. has- finally- responded. That’s more than a trade war and tit-for-tat tariffs. Our tariffs on China goods are more like sanctions for practices and behaviors contrary to accepted global trade. Theft, corporate espionage, economy-wide subsidies, forced technology transfers, forced joint ventures- things that go beyond tariffs or trade barriers are at play. There are barriers to operating in the Chinese markets that affect all aspects of commerce, law, trade, and monetary policy. When you look at the situation through this lense, you see why we do not have a typical “trade war” and why we can’t expect a typical, or easy, or immediate, resolution, but, rather a solution that is more multifaceted and multidimensional, and multi-year, in nature.
3. Allies enter into trade agreements to expand and guaranty free trade relationships. Adversaries do not enter into trade agreements as a way to resolve animosities and differences. Trade agreement, like any other agreements, require signatures- but also mutual respect and trust.
4. A temporary deal, or a deal with conditions or contingencies, is not a “trade agreement”. I suspect there will be a tariff deal with China where we will lower our impending 25% rate on China’s goods to 10% or 15% with a time frame for China to alter its practices, while China removes tariffs on our goods- particularly, any retaliatory tariffs- and makes an agreed amount of purchases of U.S. products. The material and substantive differences between a “deal on trade” and a “trade agreement” is the permanence, or lack thereof, of terms. There can be no permanence, and, thus, no certainty for businesses (and for investors) if a deal has numerous qualifications and deadlines. That is not a trade agreement- that is an agreement to maybe agree in finality upon the occurrence of complex contingencies. A resolution of the trade war is not just about sales to China; that would just be a stop-gap measure for China. It’s about “finality”, “certainty”, and clear rules of engagement, such that supply-side business planning and investment that stimulates economic growth is incented and can flourish.
Is it just semantics? No. If the Trump administration announces a “deal” has been reached, the first question is:
Does China have to do anything to keep the tariff rate from rising? If the answer is “yes” (and the list is long), then it’s not a trade agreement- and it’s uncertain.
The core differences between a “trade agreement” (and of any agreement) and a less valuable “working structure” or “agreement with conditions”: “the essence of finality” and “a reasonable certainty of terms over time”.
A trade agreement has tariff rates (or zero rates) that are fixed and final (unless one party violates their tariff rate or manipulates the sale(s) of a category of products or of an industry to benefit its own countries’ companies and/or industries). The tariffs in a “trade agreement” are not contingent on one party making structural political, legal, and economic changes to the satisfaction of the other. Such conditions, complexities, contingencies, cause A lack of definiteness and lack of clarity in the relationship.
You can call it an “agreement” you can call it a “deal”. Whatever it’s called, if it’s not “final”, or “certain”, and if it’s filled with conditions and contingencies- it’s not valuable to a company or to an economy.
From a legal perspective, a promise for a promise creates a binding agreement. But, from a business planning perspective, without “finality” and “certainty”, can it really be said that a useful deal has been made, one upon which accurate business investments, capex, and quantifiable capital risks can occur?
If an announcement comes from the Trump administration that a “deal” has been reached- look beyond the headline print … and read the fine print.
5. If China really wants a trade agreement, and truly plans to change, why show up at the G20 entirely empty-handed?
6. What’s past is prologue. Since the G20, China has done nothing to show good faith or to gain our trust or show any intention to change:
It has not passed a law to stop its people from mailing Fentanyl to Americans, as promised.
It agreed to implement only a “temporary” auto tariff reduction, and only back to the level where it already wrongly was- and hasn’t even done it.
And, oh … yes … China bought some edamame from us.
Are these the bases for all our hopes?
7. The more U.S. products that China agrees to purchase, the more persuaded I am that they want to avoid other non-tariff related topics or changes. China’s leaders no doubt believe that if they target the Trump administration’s financial sensibilities, they can avoid more significant legal and political changes.
8. I take President Xi Jinping’s recent comment related to nothing interfering with its determined policy on Taiwan, as a strong warning to the U.S. “Foreign interference in China’s Taiwan reunification issue is intolerable”, Xi said. There are more than tariff and economic issues separating the parties, including power and influence over North Korea.
9. President Trump has not exactly been solidifying agreements during his presidency: N. Korea, China auto tariffs and Fentanyl laws, health care reform, USMCA finalization, the govt. shutdown … this president’s track record for finalizing agreements is unimpressive. We are still yet to see if China will agree to any or many of the administrations requirements.
Even if China completely capitulates, in many ways, there still will be no trade agreement. Unless the President completely abandons his concerns and principles on China’s trade practices and economic structure, China will have to pay tariffs for access to our market until new policies and behaviors begin and are verified with benchmarks, standards, and inspections. Changed practices, especially on allowing foreign ownership in all industries, can only be established through a pattern of many transactions, which, by definition, will require time.
Some people think this is now about optics– and any sort of positive announcement on the relationship and the resulting good optics will be enough for the markets and for America. Those people would be wrong. This is about revenues and margins and the economy. Optics won’t help with business planning and visibility. Stocks can never do well over time without good earnings- which require reasonable levels of visibility into costs, pricing, and supply chain management issues. Sure, stocks might rally on news of “an agreement to maybe one day agree” … but earnings will be the ultimate decider. Anything other than a binary approach to either raise tariffs to a fixed long-term rate (at least until all required changes are made), or to totally forego any tariffs on China in exchange for certain immediate actions, will cause a continued lack of certainty and visibility for businesses.
Keep two thing in mind when your optimism tells you that we may soon have a good trade agreement with China:
First, we still haven’t even been able to finalize a trade agreement with Canada!
Second, the Trump administration can’t even get an agreement on international issues (immigration) with the Democrat Party … but you’re banking on one being reached with the Communist Party?
Anything less than a binary result- either a permanent tariff rate, or permanent removal of tariffs, means that in our relationship with China, uncertainty … is for certain.
China made an enormous miscalculation with retaliatory tariffs to our retaliatory tariffs. Our initial tariffs were in retaliation to years of unfair and illegal trade practices by China, which we have been complaining about for decades, through several presidential administrations. For China to retaliate to our tariffs for activities and practices that we explained and complained were unfair, and to which we were retaliating, was an act of complete disregard for international relations, international law, international practices, and for the interests or concerns of any other nation except for its own. Rather than address our retaliatory tariffs, China chose to challenge us, attempt to one-up us, antagonize us, and create a riff in relations, with the goal of continuing its practices of IP theft, corporate espionage, and protectionism, and ransacking our technological innovations; and China’s economy is paying a price for its leaders’ arrogance and decision to agitate an enemy, rather than cooperate with the world. Perhaps the Chinese leadership needs to re-read Sun Tzu’s advice in Art of War about understanding their enemy- and themselves. Or perhaps, in the long run, China will prevail in their long-term ambitions. Only time will tell. After all, Sun Tzu’s strategies are long-term ones that are grounded in fortitude … and patience.