President Ronald Reagan often repeated the admonition to “trust but verify” when it came to nuclear deals with the Soviets. President Donald Trump’s Phase One trade deal with China needs to be approached with the same skepticism.
First off, Trump’s deal with China nominally it proves he was right all along to use the pressure and tariffs to force Beijing to the table to deal with intellectual property theft and currency manipulation, which are critical elements to engaging in any level of fair and reciprocal trade with the communist regime in China.
As the President himself noted repeatedly as he talked about the deal on Friday, the parameters and specifics have been agreed upon, but they are not in writing yet. As the devil is always in the details and the details don’t really get fleshed out until the agreement is written, it is too early to take anything for granted in this precursor deal to what the President hopes will be a much bigger one to follow.
However, even with this healthy skepticism about the Chinese government’s willingness to actually follow through on any deal that helps President Trump, there are some good reasons to believe that the Chinese need this more than America does.
First and foremost, the deal is an agricultural deal. As most know, the Chinese cut purchases of American soybeans and corn amongst other foodstuffs in retaliation for tariffs being placed on their goods.
While we don’t know the breakdown of the estimated $40 to $50 billion of Chinese agricultural purchases under the deal, which are supposed to begin occurring immediately. To put this into context, in 2018, the Chinese imported $13.2 billion in agricultural products and in 2017, that number was around $20 billion, so by any measure this food stuff purchase would double traditional food exports to China from 2018, an enormous increase.
The reality behind this promised purchase is sad, but it also makes it reasonable to expect that it will occur. The Chinese are estimated to be on the cusp of a food shortage due to the lethal and currently uncurable African Swine Fever which is expected to force the culling of 300 million hogs out of a national stock of 600 million in the Middle Kingdom. America by contrast has fewer than 75 million hogs in our farms domestically. China is going to need American farmers to help them meet what could be a catastrophic food crisis, and this deal represents that reality.
On a couple of other fronts, the deal can be looked at as being relatively unlikely that the Chinese will live up to what has been verbalized about it. One key area is forced transfer of intellectual property in order for companies to access their markets. While the Chinese can give lip service to this critical component to not allowing a company’s core capacities to being stolen by their Chinese hosts through coercion, this is one area that will be very difficult to enforce, as it requires a company to complain, and if there is one thing the NBA has taught us, it is that foreign companies are not allowed to complain and still maintain a competitive chance in that economy.
As a result, the concept of forced intellectual property transfers will be pushed underground so even the best language in the final draft will likely be very difficult to enforce.
Likewise, the Chinese have promised more transparency related to their on-going currency manipulation policies that make the dollar stronger, which ensure that American made goods are always more expensive than their competitors.
Treasury Secretary Steve Mnuchin synopsized what still needs to be put in writing as follows,” “We have an agreement around transparency into the foreign exchange markets and free markets. So we are very pleased with that.”
Obviously, there are many, many questions revolving around what Mnuchin was talking about, and no one will really know what, if any, effect this language will have on future competitiveness for U.S. made goods around the world. Given that Trump is pretty determined to get a great trade deal for America and Chinese currency manipulation has to be a lead item of any sustainable deal, it is likely that there will be significant wrangling over these relative value of money concerns.
All in all, the U.S.-China phase one trade deal is a step in the right direction as long as they get the paperwork right. Keep the tariff pressure on, Mr. President to ensure China does sign the paperwork and keep their deal — and trust but verify.
Rick Manning is the President of Americans for Limited Government.