The longer Wall Street has had to comb over the details of the phase one trade deal between the U.S. and China, the more problems become apparent. Implicit assumptions about the nature of international trade as well as specific issues related to the current state of the global economy cast substantial doubt over the potential efficacy of the deal. There is little to no chance it will help balance trade between the two countries.
In broad strokes, there is no single entity “United States” conducting trade with a single entity “China.” Both countries have market economies to a greater or lesser extent, and market economies are not directed by a centralized politburo directing a certain amount of trade. China may be communist in name, but what to import or export and in what quantities are decisions made by millions of market actors according to supply and demand. None of them, with perhaps token exceptions, are constrained by quotas handed down by central authorities. China per se cannot commit to importing anything from the U.S. or anywhere else in any amount outside of what the Chinese government procures for its own needs.
True, Beijing could theoretically place quotas on imports from other countries until a certain amount of the same product or service was purchased from the United States. This would introduce significant and unnecessary strain into the Chinese economy and would necessitate a huge bureaucratic force managing the quota system. China has no reason to do this other than to try to alleviate tariffs, but the gains from lower tariffs may not even make up for the losses in enforcing importation quotas. The right to import from other countries first could even end up becoming a black market good in itself, with any quota system prone to corruption.
Beyond the quota enforcement problem, there are more specific problems with the deal as it affects the three biggest categories of Chinese imports from the U.S. The first and biggest is aircraft, which accounted for 10% ($13.4 billion) in total Chinese imports from the U.S. in 2017.
Take the Boeing (BA, Financial) issue for example. What does Boeing have to do with any of this? Quite a lot. In tandem with news about the long-awaited phase one trade deal came news that Boeing would be suspending production of its best-selling 737 MAX line of airplanes. Cross-referencing the 2017 Chinese import data with Boeing’s revenues for that year, we find that Boeing took in $11 billion in revenue from airplane sales to China. About 70% of all airplane deliveries that year were 737s according to filings, so assuming similar proportions to China, Boeing’s 737 exports to China were somewhere around $7.7 billion. That figure alone accounts for about 5.3% of total Chinese imports from the U.S. that year. This year’s figure could be zero due to the ongoing 737 MAX ban.
Another nagging problem is the recent plunge in Chinese car sales. Cars are the second-largest import category behind aircraft at $11.5 billion in 2017. Sales have fallen for 17 consecutive months now; November sales were down 3.6% from the same month last year according to the China Association of Automobile Manufacturers. On an annual basis, car sales in China have contracted for the first time this century. Given that U.S. tariffs against China are mostly still in place, pressure on car sales stemming from tariffs won’t be alleviated that much. Rather, according to CAAM, it’s an emission standard change that is the biggest reason for the ongoing sales plunge.
What most analyses of this phase one deal focus on is agriculture, even though this is only the third-largest Chinese import category. Regardless of Chinese commitments to increase agricultural imports, Chinese people won’t suddenly start demanding more food than they otherwise would. Supply and demand don’t magically change because of the insistence of the Trump administration. If China really intends to buy more agricultural products from the U.S., it will have to buy less from competitors, mainly Brazil and Argentina. This would require a national Chinese quota system discussed above. Brazil has 56% market share for soybean exports to China as of 2017. The U.S. has 34%. More imports from the U.S. means less business for Brazil, a matter the Brazilians won’t take lightly.
Even if Beijing were to impose quotas on soybean imports from other countries, the backlash from other countries in response could undo any gains the U.S. may see in its overall trade deficit. While the deal is a positive in the sense that it suspends the tit-for-tat tariff war for now, the likelihood of the deal positively affecting the U.S. trade deficit in any material way seems very low.
Disclosure: No positions.
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