Tariff hike delayed, but long way to go on China trade deal, experts say

President Donald Trump with China's President Xi Jinping during their bilateral meeting at the G20 Summit, Saturday, Dec. 1, 2018 in Buenos Aires, Argentina. (AP Photo/Pablo Martinez Monsivais)

President Donald Trump’s chief economic advisor said Monday the administration expects immediate action if China is serious about upholding an “enormous, enormous” agreement that would prevent an increase in tariffs on exports to the United States, but the demands the U.S. making may be more than Beijing is willing to give.

“Much of the credibility of this discussion will hinge on rapid movement and implementation of the Chinese commitments,” National Economic Council Director Larry Kudlow told reporters during a White House briefing.

The trade truce spun out of a dinner meeting between Trump and Chinese President Xi Jinping on Saturday night in Argentina, where both had attended the G20 summit. The White House agreed to delay an increase in tariffs on $200 billion worth of Chinese goods that had been set for Jan. 1 to give the two countries an additional 90 days to negotiate.

“I think this is just an enormous, enormous event. I know we’ve been down this road with China in the past and we’ve been quite disappointed in the lack of results and follow-through,” Kudlow said. “This one covers so much ground in so much detail, we’ve never seen this before, and furthermore, we’ve never seen this hands-on participation by President Xi.”

Although Kudlow specifically told reporters the 90-day extension begins on Jan. 1, the White House later released a corrected transcript stating the 90-day clock started on Dec. 1.

Stock markets surged Monday morning as the U.S. and China stepped back from the brink of a precarious escalation of their trade war, but those gains may not last if progress toward a lasting peace is not seen soon.

According to Kudlow, the U.S. expects changes in Chinese trade policy to be implemented as early as Monday. Trump claimed on Twitter farmers will be “a very BIG and very FAST beneficiary” of the deal.

“My meeting in Argentina with President Xi of China was an extraordinary one,” Trump said. “Relations with China have taken a BIG leap forward! Very good things will happen. We are dealing from great strength, but China likewise has much to gain if and when a deal is completed. Level the field!”

The Trump administration placed tariffs on $50 billion worth of Chinese imports in June, sparking retaliatory tariffs by China on many U.S. products. In September, 10 percent tariffs were imposed on $200 billion in Chinese goods with the intent to increase them to 25 percent at the start of 2019.

The deal struck in Argentina Saturday delays that tariff hike until April, with U.S. Trade Representative Robert Lighthizer, who Kudlow called “the best trade negotiator in the business,” leading talks for the U.S. Trump has delayed action several times before in dealing with China only to move forward with penalties later after negotiations stalled.

Gary Hufbauer, a nonresident senior fellow at the Peterson Institute for International Economics, said the selection of Lighthizer to head up negotiations indicates the Trump administration is taking a hard line on China’s trade abuses, but the long-term significance of the agreement will not be clear until more concrete commitments are made.

“The big winner is the financial markets, which showed their spunk today,” Hufbauer said. “If it’d come out the other way, if Trump had a big argument with Xi and said we’re going to have 25 percent tariffs, I think the markets would be down 400 points instead of up 400 points.”

According to Claude Barfield, a resident scholar at the American Enterprise Institute and a former consultant to the Office of the U.S. Trade Representative, it appears Trump backed down from his threats in exchange for the kind of vague promises China has been making and breaking for years.

“Trump is kind of the Neville Chamberlain of trade policy,” he said, referring to the British prime minister’s appeasement of Nazi Germany in the 1930s.

However, Jim Roberts, a research fellow for economic freedom and growth at the Heritage Foundation, said both sides stand to gain from holding off on tariffs that would have driven up costs for businesses and consumers on both sides of the Pacific.

“It’s a truce, but that means the very high 25 percent tariffs are not going to be levied for another 90 days, which is good, I think, for the American economy Obviously, it’s also good for the Chinese economy,” Roberts said.

There was considerable uncertainty about the terms of the ceasefire Monday. Treasury Secretary Steven Mnuchin told reporters outside the White House no official documents outlining the Chinese concessions would be released, and the initial information put out by the two countries differed somewhat on the specifics.

According to a White House statement, Xi agreed China would purchase “a not yet agreed upon, but very substantial, amount of agricultural, energy, industrial, and other product.” It also said the two countries will begin negotiations on “structural changes with respect to forced technology transfer, intellectual property protection, non-tariff barriers, cyber intrusions and cyber theft, services and agriculture,” and the tariffs will increase to 25 percent if no agreement is reached. On Twitter, Trump claimed China would eliminate a 40 percent tariff on vehicles imported from the U.S.

Chinese officials and state media outlets initially made no mention of a 90-day deadline, China agreeing to purchase substantial amounts of U.S. products, or a reduction of tariffs on American-made cars. According to Kudlow, there was no specific agreement on the auto tariffs, but the administration expects them to be reduced to zero, which would be a better deal than the rest of the world is getting but not necessarily an enormous boon for U.S. manufacturers.

“China is not concerned about going to zero on its auto tariffs with respect to the U.S. What it’s concerned about are imports from Korea,” Hufbauer said, adding that a special agreement that exclusively allows tariff-free imports of American cars could run afoul of World Trade Organization rules.

China buying more U.S. agricultural products would be great for some farmers, but the broader impact of these commitments on the economy and the trade balance would likely be limited, according to Barfield.

President Trump hailed the agreement as an “incredible deal” afterward, but business groups offered more tentative assessments. While there was widespread agreement that delaying the increase in tariffs was a positive development, there was also recognition that the underlying issues driving the dispute have not been addressed.

“We welcome the announcement that President Trump and President Xi are de-escalating tensions and returning to the negotiating table. Setting aside the imposition of tariffs is the right course of action for U.S. workers, job creators, and the economy,” said Myron Brilliant, executive vice president and head of international affairs for the U.S. Chamber of Commerce, in a statement.

Soybean growers also expressed cautious optimism.

“This is the first positive news we’ve seen after months of downturned prices and halted shipments. If this suspension of tariff increases leads to a longer-term agreement, it will be extremely positive for the soy industry,” said John Heisdorffer, American Soybean Association president.

The deal reached by Trump and Xi included several details unrelated to trade as well. China agreed to designate fentanyl as a controlled substance, stiffening penalties for exporting a substance that has caused many overdose deaths in the U.S. Xi also threw formal support behind a planned second meeting between Trump and North Korean leader Kim Jong Un on denuclearization.

The agreement on fentanyl was significant, but experts say some of the trade concessions amounted to defusing an economic threat Trump created when he imposed the tariffs in the first place. Even if all the tariffs and counter-tariffs are rolled back and China buys more U.S. products, the structural problems remain.

“There is a pattern to the foreign policy of @realDonaldTrump. We have seen it w N Korea, NAFTA, and now China. He creates a sense of crisis, compromises, and both claims he accomplished more than he did and deserves credit for having defused the crisis that he largely created,” said Richard Haass, president of the Council on Foreign Relations, on Twitter.

According to Hufbauer, it is possible the end result of all this drama will be a complete overhaul of China’s trade policies, but forced technology acquisition, intellectual property theft, and heavy subsidies for state-owned enterprises are currently central to Beijing’s economic development model.

“Getting rid of the retaliation China has imposed on the U.S., that’s just going back to square one,” he said. “The real progress would be a Chinese decision to liberalize its tariffs and its non-tariff barriers on stuff the U.S. is good at exporting.”

Ninety days is not much time to negotiate a final deal, if a deal can be reached at all. Many of these U.S. concerns have proven intractable in the past.

“They may hold out even with 25 percent [tariffs],” Barfield said, noting that signs of trouble on the horizon for the U.S. economy may upset the conventional wisdom that China is negotiating from a weaker economic position.

Roberts, who worked with the Office of the Trade Representative on confronting China’s systemic trade abuses when he served in the State Department, stressed that intellectual property violations, online piracy, patent infringement, theft of industrial secrets, and other types of malfeasance are longstanding concerns. If some progress can be made over the next three months to address them, delaying the tariff increase further could be justified.

“Those are all big issues and for sure they’re not going to be solved within a 90-day period, but I think there’s some room for optimism China may agree to some concessions,” he said.

Roberts highlighted Dec. 18 as a date to watch to see how China commemorates the 40th anniversary of Deng Xiaoping’s reforms that opened China’s economy to the world. If China is committed to further reform and integration with the international system, that would be a moment to celebrate it.

“It’ll be kind of a signal how much attention that anniversary receives in China under the Xi Jinping government,” he said.

Experts agree Saturday’s dinner was, at best, the first step in a long process, and nobody should expect problems that have grown for over a decade will be solved by Mar. 1. How big of a first step it is will depend on what China actually committed to and how effectively the Trump administration can hold Xi to those commitments.

“It’s up to the administration now to dot your I’s and cross your T’s,” Barfield said. “This is still pretty vague stuff.”

Despite his confidence in Lighthizer and his belief that Xi is on board with serious reforms, Kudlow admitted Monday there is still plenty of reason for doubt.

“We’ve been down this road before historically and the story has always been disappointing,” he said. “Stuff they say will get done doesn’t get done. I’m not questioning them right now. I’m just saying the history’s not great I hope it has a happy ending.”

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