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New China trade deal: President Trump scores a key economic win

Written By | Jan 20, 2020
new China trade deal

Cartoon by Garrison. Reproduced and resized by arrangement and with permission of Grrraphics.com.

WASHINGTON — President Trump has just signed the Phase 1 of a new China trade deal. The complexity of the American and Chinese relationship makes achieving complete trade deals very difficult. But Trump’s new China trade deal makes a monumental first step toward free and fair trade that addresses problems in key US farming and industry sectors. In the short term, the deal helps sectors like these that bore the heaviest burden in this bilateral trade war. But in the long term, Chinese will open their markets to compete more fairly with US manufacturers.


Also Read: Trump, China VP Liu sign trade deal, Senate gets impeachment articles

Highlights of the new China trade deal with the US

Chalk up this trade deal is a huge win for all Americans. It’s a particular boon for American workers, taxpayers, businesspeople, consumers and investors. Details of the new China trade deal include the following.

  1. China has agreed to continue to eliminate tariffs on agricultural products.

    They pledge to purchase as much as $50 billion of American farm produce over the next two years. This is great news for America’s farmers. They have struggled since China retaliated against Trump’s tariffs by placing tariffs on farm products even as a phenomenally wet 2019 spring and summer season worked against the volume of their production. The trade deal assures our farmers a strong steady demand for their products coming from China in 2020 and beyond.

  2. China also agreed to purchase another $150 billion of US manufacturing goods.

    This volume of new orders promises to increase production at many US factories. In turn, it will also help increase the demand for factory workers.  Moreover, the newly re-opened Chinese markets for American goods will remain open into the future.

  3. China has also agreed to stop manipulating their currency.

    Analysts view this as an unheard-of victory for America’s business and manufacturing sectors. Historically, China routinely devalued its currency. This, in turn, made their goods cheaper for us to buy while making our manufactured goods too costly for the Chinese to buy. That’s why so many American companies started began moving their manufacturing operations to China. And that, in turn, is why we currently hold such a negative balance of trade with that country.

  4. Finally, American companies can now own 100% of their company facilities in China.

    Prior to this new agreement, any compan facility in China owned by Americans had to be majority-owned by a Chinese entity. Ao Americans ended up owning only 49% of their own company and facilities located in China. Now they can own 100%.

  5. And lastly, the new China trade deal also begins to address the protection of American intellectual property rights.

    The new deal also opens Chinese financial markets to US companies as well.

What comes next?

The next phase of the new China trade deal may prove quite difficult to hash out. But in the meantime, this first phase can strengthen a fair and truly mutually beneficial economic relationship between the US and China. An added bonus: Generally, as economic relationships improve, political relationships tend to also improve.

One issue not addressed in Phase 1 is government subsidies of Chinese companies.  Because Chinese government subsidies pay some of the Chinese companies costs, they can profitably sell their products at lower prices.  This allows companies to grow quickly.  The Chinese government considers these subsidies investments since the new companies eventually end up generating far more government revenue than the cost of the subsidy.




The complex problem of national trade subsidies

However because the subsidized company profitably sells products at a lower price, unsubsidized US companies cannot compete. Businesses close and factories are shut. But many Chinese companies get a subsidy and China will not want to slow growth by agreeing to eliminate subsidies. This will be a difficult problem to solve.

Other countries do the same thing. In Europe, Airbus receives large government subsidies. In spite of the World Trade Organization (WRO) determining that the subsidies are not legal, they still continue. Airbus was formed about 20 years ago.  Partly because of government subsidies, Airbus is now the largest airplane manufacturer in the world.

The next Phase of the new China trade deal with the US could take some time.

Phase 2 of the  China trade deal will take some time as those difficult issues are addressed. Adding to the difficulty is political issues.  Hong Kong and Taiwan are problems for China as the residents there seek more freedom and Democracy.  The US generally supports these positions, but that support is in direct conflict with China’s interests.

And what about those pesky Norkies?

Then there is the vexing issue of North Korea. Trump wants that “people’s republic” completely de-nuclearized. North Korea is reluctant to do that. An additiona problem: China is North Korea’s largest trading partner and both countries maintain a longstanding relationship there. What happens here remains to be seen.

Meanwhile, Phase 1 of the deal is a huge success. Combine this with the USMCA, the new, free and finally fair trade deals that Trump has signed with Mexico, Canada, South Korea and Japan. And what we now have are major foreign markets now more fully open to working with and buying from American business. That means more jobs and generally rising wages, with more opportunities for businesses to expand significantly.

President Trump has won the first round of the international trade war, although there issues still remain with many additional countries, including the Eurozone. But thus far, Trump’s tough bargaining position has ensured that foreign markets will be open to US businesses in a way they never have before. And this is great news for all Americans.

— Headline image: Cartoon by Garrison. Reproduced and resized by arrangement and with permission of Grrraphics.com.

 

Michael Busler

Michael Busler, Ph.D. is a public policy analyst and a Professor of Finance at Stockton University where he teaches undergraduate and graduate courses in Finance and Economics. He has written Op-ed columns in major newspapers for more than 35 years.