A China Tariff Rollback Is Not ‘Phase 1,’ It’s ‘Square 1’
Kenneth Rapoza, Senior Contributor, Forbes
Nov 8, 2019
Reports of a tariff rollback in order to pass the so-called Phase 1 trade deal is more like going back to square one than the mini-deal President Trump and China’s vice premier Liu He touted last month.
According to Bloomberg, China’s Ministry of Commerce said that the rollback depends on the “content” of the phase 1 deal. China has been asking for the removal of tariffs as a prerequisite to giving up anything Washington wants in trade negotiations.
What is known so far is that China is supposedly going to import agricultural commodities on par to the value and volume they did pre-trade-war, and China agrees to two things: opening up its market more to financial services firms (already doing that) and getting tough on intellectual property (already doing that).
It is unclear whether the tariff rollback means all of the roughly $300 billion in existing tariffs, or if it means some tariffs.
For sure, tariffs are the only way for the U.S. to increase the risk to multinationals for manufacturing in China and exporting goods back home. Without tariffs, there’s no decoupling unless Treasury imposes sanctions on corporations, making it illegal for American firms to do business with them, depending on the extent of the sanctions.
For example, U.S. companies are banned from investing in and supplying Russian oil and gas companies with equipment that is used in offshore drilling for hydrocarbons, or providing technology that would help Russia with onshore horizontal drilling. Exxon lost a roughly $720 million joint venture deal with Rosneft to drill for oil and gas in Russia’s Kara Sea because of it.
Barring sanctions such as those, China would be impossible for Americans to turn away from given its economies of scale, logistics, labor force and low taxes.
Writing in the Financial Times on Wednesday, Alicia Garcia-Herrero, chief economist for Asia Pacific at Natixis in Hong Kong, said the rally in the China currency and in its stock market on trade hopes “should be tempered.”
“The world’s second-biggest economy remains in a tight spot,” she wrote. “Compared with its previous slowdown in 2015, the Chinese economy is in worse shape today.”
If China is in a tight spot, fearing companies will exit and lead to layoffs of blue-collar workers, then a return to pre-trade-war tariffs would be quite the score. Companies that were thinking of leaving because of tariffs would sit tight. Companies already planning on leaving to Bangladesh or Vietnam will still leave regardless.
But what would the U.S. get out of it? Is a return to the U.S. soy market and the promise (a year’s old one) to let Visa and Mastercard operate in China going to protect American manufacturing? Is it going to lower the trade deficit?
As one market participant said in an informal conversation with me the other day on China trade, either this is some wicked 4-D chess or this is the dumbest move ever.
A tariff rollback makes the stock market happy. So that could, in theory, benefit Trump as he seeks reelection in 2020. However, Obama’s stock market was booming too and that didn’t help the Democrats in 2016. Moreover, the stock market was doing great in 2018 and the Republicans got clobbered in the House of Representatives, including in counties Trump won. A good stock market gives Trump doesn’t give Trump a lock on anything.
“This agreement would not entail major concessions from either the U.S. or China,” says Agathe Demarais, the global forecasting director at The Economist Intelligence Unit (EIU).
Agricultural trade is merely one step forward after one step backward. The U.S. wants China to double its annual average purchases of farm products to at least $40 billion within two years of an agreement. That would mean China would have to abandon Brazil to a large extent. China imports around $22 billion worth of American agriculture. Brazil is its number 2 go-to farm commodity market. It’s been China’s leading soybean market since it abandoned the U.S. due to the tariffs they imposed.
Worth noting, China recently signed deals to buy pork meat from Brazil...