Monday, Dec. 23, 2019 | 2 a.m.
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President Donald Trump has essentially declared victory in his relentless trade wars against China and Mexico, but whether this is a lasting triumph or just a truce remains to be seen. Even Trump may not know what comes next.
Here’s a summary of what’s happened recently.
First, China.
It agreed to buy substantial amounts of U.S. exports over the next two years, according to the Trump administration. The actual amounts are $40 billion to $50 billion annually of farm commodities, presumably led by soybeans. In addition, China has pledged to buy another $100 billion of U.S. of non-farm goods — say, energy equipment — spread over two years. All told, the two-year commitments total $200 billion.
The goals are admittedly ambitious, says economist Mary Lovely of the Peterson Institute, a think tank specializing in international economic issues. The previous peak in annual U.S. food exports to China was $26 billion, she notes, meaning that the annual targets are nearly twice the historical high. It’s unclear whether the target can be reached, Lovely says.
In return, Trump reduced stiff existing and planned tariffs on China’s exports to the United States. A 15% U.S. tariff imposed in September on an estimated $120 billion of Chinese goods would be cut in half to 7.5%. In addition, a planned 15% tariff increase in December on another $160 billion of Chinese exports was rescinded.
Half or more of this next round of exports would have consisted of smartphones and laptop computers, says Lovely. Producers in China, including suppliers to Apple, would have had to pay the tariffs, which presumably would have been passed on to consumers in higher prices. This gave both the United States and China an interest in avoiding more tariffs.
Next, Mexico.
The original U.S.-Mexico-Canada Agreement (USMCA) — a replacement for the 1994 North America Free Trade Agreement (NAFTA) — was approved by the United States, Canada and Mexico in September 2018. But before it could take effect, it had to be endorsed by the legislatures of the three countries.
This, in turn, required changes in the treaty to win domestic support. The most conspicuous compromise to free trade principles involves the auto industry. To qualify for zero tariff treatment, vehicles must have 75% of their value made in North America, up from 62.5% under NAFTA. In addition, at least 30% of the work on the vehicles must be done by employees earning at least $16 an hour. By 2023, this requirement would rise to 40%.
In addition, American unions, their Democratic supporters and their liberal allies in Mexico successfully insisted on provisions making it easier to unionize factories and other businesses. Alleged violations would be referred to a three-member panel for resolution.
Just how all this works in practice is unclear. Despite its many controversies, the USMCA still resembles the old NAFTA in that it allows most exports from the three countries to pass into the other two countries without paying any tariffs. But the exceptions matter. A study by Love and Jeffrey Schott says the mandated auto costs will result in “higher auto prices, reduced U.S. demand ... and more rapid substitution of machines for workers.”
Similar qualifications and uncertainties apply to U.S.-China trade. Some of the thorniest issues have yet to be resolved, including widespread government subsidies to Chinese companies and obstacles to U.S. companies that want to export to China. In a report to clients, the consultancy Capital Economics says it is “not convinced that (the latest agreement) will hold.”
As usual, a lot hangs on what our capricious president ends up doing. The truce will last as long as he believes it should. For Trump, the trade issue is a tempting exercise in political symbolism, demonstrating that he cares about American workers and can protect them against the unfair foreigners.
In their study, Lovely and Schott put it this way: “Given a U.S. president who sees tariffs as America’s main stick to ensure compliance with U.S. demands, peace is not guaranteed.”
Robert Samuelson is a columnist for The Washington Post.
