If you’re making certain business and investment decisions with the hopes and expectations of a U.S.-China trade agreement, I’d urge you to curb your enthusiasm, as follows:
- 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. This one-dimensional definition does not apply to the multi-dimensional U.S.-China problem. Neither party is particularly interested in helping cause the other to prosper.
The low or zero tariff rate in a true “trade agreement” are not contingent on one party making structural political, legal, and economic changes to the satisfaction of the other. A trade agreement has tariff rates (or zero rates) that are fixed and final (unless one country violates its 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).
We don’t have an existing “trade agreement” with China. It’s not like NAFTA, where we have to replace an existing agreement. Our “agreement” with China is this: If you stop violating international laws and accepted global trade and financial practices, and prove it, 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. There’s no reason for or benefit to the U.S. to enter into a trade agreement with China. China doesn’t honor terms, laws, or obligations. With China in violation of international laws and global trade norms and practices, and no apparent internal desire to change, we have no reason to, or benefit from, a trade agreement with China.
- The term “trade war” over-simplifies this dispute. This dispute’s inception 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 in-kind response. It’s true that a “trade war” is one nation’s significant protectionist actions or policies met by another nation’s countervailing actions or policies. But, 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 protect the entire country and close-off access to all industries by either limiting foreign ownership and requiring IP disclosures and transfers in exchange for access. This goes far beyond trade protections. China has been operating in an unacceptable manner in contravention of global practices and acceptable legal and commercial standards for many years. This is more than a trade war and tit-for-tat tariffs. It’s a broad strategy by China to steal property, circumvent laws, and unilaterally benefit from general market access which China, itself, denies, in all respects, to others. Just by virtue of subsidizing private (or supposedly private) companies in China, China is violating the very spirit of international trade and trade agreements in the most fundamental of ways. This practice is counter to the entire purpose or usefulness of trade agreements for any other country. Our tariffs on China’s goods are more like sanctions for practices and behaviors contrary to accepted global trade and international laws. It’s like China is being punished for breaking the law, and then being put on parole. Theft, corporate espionage, economy-wide subsidies, forced technology transfers, forced joint ventures- things that go beyond tariffs and single-product or single-industry protectionist 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. Our disagreements and disputes with China should never have been labeled a “trade war” by the media or by the White House or Congress. This is an all-out disagreement about cultures, values, laws, and economic and political structures. We are at war with China in every conceivable way over every conceivable issue, which has led to tariffs, counter-tariffs, and a “trade war” as a symptom, or result of the differences. The tariffs on China are in response to all of our grievances, and are not just tariffs in response to tariffs (or other industry or product-specific measures). If you add in theft, espionage, currency manipulation, trade route military tensions, and tensions over geographical control, such in over Taiwan and North Korea, China is as much an enemy of the U.S. as is any other nation we consider to be an enemy.
When you look at the situation through this lens, you see why we can’t expect a typical, or easy, or immediate, resolution, as you might see in a “trade war”, but, rather a solution that is more multifaceted and multidimensional, and multi-year, in nature.
- If China really wants a trade agreement, and truly plans to change, why show up at the G-20 entirely empty-handed, even with tariffs in place and with new tariffs being threatened.
- 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. Disputes are not settled with trade agreements. Trade agreements, like any other agreements, require signatures- but also mutual respect and trust … and these elements do not exist between the parties.
- 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 tensions in the South China Sea and a struggle for power and influence over North Korea.
- So- if we make no trade “agreement”, what about a trade “deal“?
It depends on what you consider a “deal”. A real “deal” has “certainty” and “finality” of obligations and expectations. A temporary “deal”, or a “deal” with conditions and contingencies that go beyond one party must act to obligate the other to act, lacks “certainty” and “finality”, and is not good for businesses. There can be no permanence, and, thus, no certainty for businesses (and for investors) if a deal has numerous and complex unilateral requirements that take months or even years to prove. That is not much more than a punch-list of items that are hopefully executed on. A valuable “deal” with regard to and for businesses, must have “finality”, “certainty”, in the short or medium terms, and clear rules of engagement, such that supply-side business planning and investment that stimulates economic growth is incentivized and can flourish. A “springing deal”, one that takes effect only if other contingencies are satisfied, is hardly “certain”. “deal” where tariffs can be re-established if China fails to meet its obligations and convenants of any kind is cause for concern of a lack of “certainty”.
Even if China completely capitulates, in many ways, or even in all ways, there still will be no “final” and “certain” “deal”. 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 compliance begin, and are verified with benchmarks, standards, and inspections. Changed practices, especially on allowing foreign majority ownership in all industries, can only be established through a pattern of many transactions, which, by definition, will require time.
From a legal perspective, a “promise by one party in exchange for a promise by a counter-party” creates a binding agreement. But, from a business planning perspective, without “finality” and “certainty”, such as a deal based on promises to act in the future, rather than on actions that can and will be immediately taken and proven, can it really be said that a useful deal has been made for businesses, one upon which accurate business investments, capex, and quantifiable capital risks can occur?
Ask yourself this: Does it “feel” like China wants to go along with our rules and requirements? Does it “feel” like China wants to be a party to our version of a trade agreement or trade deal? How can you do business with a party that will resent you day-in and day-out for making it act and operate as you dictate?
The more U.S. products that China agrees to purchase, the more persuaded I am that it wants to avoid non-trade 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, economic, and political changes as part of a trade deal.
I suspect there will be a temporary tariff deal with China (on, or in 60 days from March 1) where we will lower our impending 25% rate on China’s goods to 10% or 15% with a time frame (1-3 years) for China to alter its practices, while China, immediately, removes all tariffs on our goods- particularly, any retaliatory tariffs- and, immediately, makes an agreed amount of purchases of U.S. products. No greater reduction of tariffs will be made before China completes its promises- and the rate could rise in 1-3 years if China fails to meet its obligations. Any “deal” would be a “China goes first” deal. President Trump will not allow China to rebuild itself through access to our market with the risk that China is bluffing and defaults on its obligations in 3 months, or 6 months, or 3 years, or 6 years. China’s changes must be tested, proven, and certain.
If an announcement comes from the Trump administration that a “deal” has been reached- look beyond the headline print … and read the fine print. You can call something a “deal”, even without the necessary elements and benefits of one. But, just because you call a daisy a rose- it does not make it one. China may never be able or desirous of meeting the terms of a “deal”.
No FAKE DEALS, Mr. President!
7. 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?
8. President Trump has not exactly been solidifying agreements during his presidency: N. Korea denuclearization, China auto tariffs and Fentanyl laws, repeal of Obamacare, USMCA finalization, the full length of a border wall … this president’s track record for finalizing agreements is unimpressive.
Some people (in particular, equities analysts and traders and asset and portfolio managers seeking any reason for stocks to rise) think that this is now about optics– and that 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, customers, pricing, and supply chain management issues. Sure, stocks might rally on news of “a deal” … 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 immediately proven 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 trade agreement or final and certain trade deal with China:
First, we still haven’t even been able to finalize a trade agreement or trade deal with Canada and Mexico!
Second, the Trump administration can’t even reach an agreement on international issues (immigration) with the Democrat party …
… and you’re banking on one being reached with the Communist party?
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 China’s 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 The Art of War about understanding the enemy- and one’s self. Or perhaps, in the long run, China will prevail in its long-term ambitions. Only time will tell. After all, Sun Tzu’s strategies are long-term ones that are grounded in fortitude, farsightedness … and patience.