The China Trade Deal, Phase I

China Trade Deal Phase I, An Honest Review
The View from the Middle

Here’s a great Presidential Debate question – What country represents the greatest geopolitical threat to America? Remember, this question was asked of Mitt Romney in 2012 and he answered, Russia. You probably remember Barack Obama’s answer even better. He told Romney that “the 1980’s wanted their foreign policy back”. While this was a cute, clever taunt by then President Obama, recent history has proven Romney to be more on-target than our then Commander in Chief. Today, if that question was asked, I would hope that both candidates would agree that the answer is – China.

Newt Gingrich has recently written an excellent book called Trump vs. China. Don’t be fooled by the title. It probably should have been entitled The USA vs. China. It confirms that China’s long-term plan is to replace us as the single global power (the middle kingdom as they would call it) and to do so in a very short order (probably even in my lifetime and certainly in the lifetime of the millions of millennials and Generation X’s and Z’s). And the consequences of this authoritarian, communistic state surpassing us economically and militarily are chilling.

Newt helps his readers understand how we got to where we are today. You see, for many years, from at least Reagan through Clinton, it was our national policy to build China up economically and militarily to reduce Russia’s influence on them. During those years China played the poor, helpless, 3rd world country card and gladly lapped up our financial aid, intellectual capital and even our military assets and technology. Somewhere in the early 2000’s however, China began to hit their stride and employed a strategy of lying, cheating and stealing to reach their eventual goal, which is to see them return to their rightful position in the world – the middle kingdom.

Trump, to his credit, did at least recognize and begin to address one area of China’s plan, their economy. You see, China has been cheating everyone in the world for years in this area. They manipulate their currency to give their products an advantage in every marketplace. They have obstructed participation in the Chinese market by forcing companies to acquire Chinese partners in their ventures and requiring that those partners maintain a 51% control of those businesses. This, of course, accomplished another goal of the Chinese government, and that was the forced transfer of intellectual capital into Chinese hands. And where this technique to forcefully attain the secrets of each business’ success (their processes, their techniques and technology), their government has looked the other way as Chinese companies stole from their competitors and partners alike. All of this has contributed to the $621 billion annual deficit in goods and services experienced by the US with China as reported by The Department of Commerce in 2018.

The phase one deal with China does at least address these issues and that is why the markets have responded so well to it. First, China has promised to buy an additional $200 billion in goods and services from the US over the next two years. This will mostly come in the form of manufactured goods, agricultural products and energy. Second, China has agreed to allow investment firms, asset management companies and insurance firms to be wholly owned by foreign companies by April 1st, 2020. Additionally, China has agreed to expand their laws and increase penalties for IP (Intellectual Property) theft and to participate in conflict resolution to settle allegations levied by US companies. Finally, China has promised not to manipulate their currency to disadvantage the US and other countries and agreed to follow International Monetary Fund rules on macroeconomic policies.

This indeed was a good first step, but of course, the Chinese have made similar promises in the past. What gives us any hope that China will not ignore their own promises yet again? In other words, what is to keep China from lying and cheating again, just as they have in the past?

The answer is that Trump holds the sword of tariffs over China’s head thus positioning himself as the judge if China violates any of their vows. He just canceled an increase in tariffs from 25% to 30% on $250 billion in Chinese imports into the US market (their exports). He also reduced tariffs on $112 billion of their exports from 15% to 7.5% as part of this phase one deal. That’s a $20 billion hammer that Trump can slam down if China decides to renege on their promises.

This still does not guarantee that China won’t try to squirm out of their agreement just as they have in the past, but Trump’s ability to punish them quickly (a great negotiating technique) gives me hope. And don’t we all HOPE this actually works?