How To Grade the Trade Deal

Photo courtesy of Mohamed Hassan


As he attempts to finalize his trade deal with China, President Trump is in the unique negotiating position of having political support for extreme, punishing tariffs. The tariffs he’s implemented so far have cost the country billions, but Trump’s message that China has been engaged in unfair trade practices has convinced his base that such tariffs are a necessary part of his trade war. This means that Trump can make threats that past presidents could not, which gives him significantly more leverage in negotiations. However, this does not mean that a good deal is a foregone conclusion.

Blocking an enemy county’s trade is often an effective tactic in war. Regrettably, blocking trade into one’s own country is often an effective tactic in politics, even though the effects are just as damaging no matter the target.

The ultimate test of any trade deal is how free it makes trade. A good deal with China will have low tariffs, commitments to respecting intellectual property and restricting corporate espionage, and will aim at reducing protectionism on both sides in the long term in an enforceable way.

A bad trade deal would be one where China agrees to make one-time purchases of certain American goods. Politically powerful industries like agriculture and manufacturing would benefit temporarily from such purchases, but in the long run they would do nothing to address the significant problems that are preventing free trade from occurring between China and the U.S.

U.S. businesses in China have remained hopeful that the current talks will produce concrete outcomes. For now, they support the pressure that the administration is putting on the Chinese with tariffs, but only as a means of reaching a better deal.

Ultimately, businesses want long term certainty and stability. Stock prices drop when trade talks threaten to break down, which demonstrates how widespread the effects of a bad trade deal would be. The market’s reaction to tariff news should trouble those who believe that protectionism is ultimately beneficial to the economy.

It is true that China competes better than the U.S. in certain industries, and that with fully free trade the domestic versions of those industries might suffer, but the economy as a whole is surely better off. The vast majority of the companies in America are affected by trade with China in some way, as evidenced by their close attentiveness to news about the upcoming deal. If tariffs were simply a matter of protecting U.S. steel workers and farmers, there would not be so swift a reaction on Wall Street to the ups and downs of the trade talks.

For the moment, tariffs have been effective at improving the United States’ negotiating position, though at a substantial and ever-growing cost. A trade deal that leaves in place significant portions of the current tariffs would not be a victory for the United States. As negotiations come to a close, it remains to be seen whether Trump’s trade deal will be a substantive win for the economies of both countries or a symbolic victory for the president and his special interests.