Global| Oct 14 2019Trade Negotiations – US Agrees To A Farm Package, Not Trade Deal With China
|in:Viewpoints
Summary
After 18 months of negotiations, the trade talks ended with the US achieving very little. It is wrong to call this a "trade" deal, let alone a "substantial " one since the focus, almost exclusively, of the Trump Administration has [...]
After 18 months of negotiations, the trade talks ended with the US achieving very little. It is wrong to call this a "trade" deal, let alone a "substantial " one since the focus, almost exclusively, of the Trump Administration has been to reduce the trade imbalance and the agreement on farm purchases accomplishes little. It is also wrong to call it a trade "truce" since outstanding tariffs are still in place and future tariffs have not been rescinded. As such, Phase 1 of trade talks ended with many issues unsettled, leaving businesses and investors unsure on what lies ahead.
According to press reports, China has agreed to increase its purchases of US farm products up to $40 to $50 billion, although no timeline was offered. The US agreed to postpone a planned increase in tariffs scheduled to take effect on October 15, but let stand existing tariffs and did not remove the planned tariffs to take effect in December. Both sides agree to establish new rules to prevent currency manipulation (although the US designation of China as a currency manipulator still stands). Finally, it is reported that "progress" (no details) was made on intellectual property protection.
Remove for a second the two countries that are involved in these trade negotiations and just look at what has been announced. Country B has agreed to purchase $40 to $50 billion in farm products from Country A. On the surface, it would suggest that the bi-lateral trade deficit between the two countries is largely centered in agricultural goods and Country A has a comparative advantage (or a surplus) in farm (agricultural) goods. None of that is true.
In 2018, the bilateral merchandise trade deficit between US and China totaled $419 billion. Yet, trade in farm or agricultural goods reduced the overall trade deficit between the US and China. In 2018, the US exported $9.3 billion of agricultural goods to China and imported $4.9 billion, recording a small surplus of $4.4 billion in farm products.
In 2018, the gross output of the US farm sector totaled $380 billion, or about 1% of the gross output of all industries. Roughly one-third, or $133 billion of farm products were exported to all trading partners. Even if the US directed all of its agricultural exports to China it would only reduce the bilateral trade deficit by one-third. But that would not result in a lower overall US deficit as it merely increases, by a like amount, the US deficit with the rest of the world. In other words, shifting the direction of farm exports does not solve the US overall trade imbalance.
None of this is meant to downplay the important role of the farm economy, or to overlook the hardship the farm sector has experienced during the trade dispute between US and China.
Yet, the bilateral trade imbalance between the US and China involves many factors and the US needs to break away from the zero-sum thinking on China trade, because at the moment it is harming not helping US growth prospects.
Viewpoint commentaries are the opinions of the author and do not reflect the views of Haver Analytics.
Joseph G. Carson
AuthorMore in Author Profile »Joseph G. Carson, Former Director of Global Economic Research, Alliance Bernstein. Joseph G. Carson joined Alliance Bernstein in 2001. He oversaw the Economic Analysis team for Alliance Bernstein Fixed Income and has primary responsibility for the economic and interest-rate analysis of the US. Previously, Carson was chief economist of the Americas for UBS Warburg, where he was primarily responsible for forecasting the US economy and interest rates. From 1996 to 1999, he was chief US economist at Deutsche Bank. While there, Carson was named to the Institutional Investor All-Star Team for Fixed Income and ranked as one of Best Analysts and Economists by The Global Investor Fixed Income Survey. He began his professional career in 1977 as a staff economist for the chief economist’s office in the US Department of Commerce, where he was designated the department’s representative at the Council on Wage and Price Stability during President Carter’s voluntary wage and price guidelines program. In 1979, Carson joined General Motors as an analyst. He held a variety of roles at GM, including chief forecaster for North America and chief analyst in charge of production recommendations for the Truck Group. From 1981 to 1986, Carson served as vice president and senior economist for the Capital Markets Economics Group at Merrill Lynch. In 1986, he joined Chemical Bank; he later became its chief economist. From 1992 to 1996, Carson served as chief economist at Dean Witter, where he sat on the investment-policy and stock-selection committees. He received his BA and MA from Youngstown State University and did his PhD coursework at George Washington University. Honorary Doctorate Degree, Business Administration Youngstown State University 2016. Location: New York.