Texarkana, TX 79° Tue H 81° L 68° Wed H 89° L 73° Thu H 87° L 71° Weather Sponsored By:

China deal wouldn't change much

China deal wouldn't change much

May 11th, 2019 by Tyler Cowen in Opinion Columns

Right now many of us are suffering from a combination of whiplash and fatigue brought on by the Trump administration's trade talks with China. Are his tweets real threats, or a bluff, or just reflective of his mood? Is Vice Premier Liu He coming to Washington to resume the talks or not? How will markets react to each new development?

Yes, these machinations matter. But it is more important to focus on the big picture: The trade talks are chaotic because a trade deal would be chaotic. By which I mean, it would be difficult to interpret and enforce, not unlike the present situation. All this is true even without considering the additional uncertainty introduced by the unique personality and communication methods of Donald Trump.

The basic problem is easy enough to state, though it is all but impossible to solve. Many of the U.S. objections to Chinese trade practices, regardless of their merits, are fundamental objections to how the Chinese economy is organized. They are more than mere complaints about easily monitored variables such as tariff rates.

The Chinese economy is rife with state-owned enterprises, which receive cheap credit from state-owned or state-connected banks, as well as numerous other government privileges. Furthermore, China engages in extensive industrial espionage, which is not easy to trace or confirm, even when you know it is going on. The Chinese are also enacting a systematic industrial policy to catch up to or surpass the U.S. in some crucial areas, again with government aid. This complex environment cannot be well-summarized by facts or numbers.

In short, any attempt to rein in China faces the problem of how to enforce the discipline. China's transgressions, or supposed transgressions, are hard to confirm and monitor. Economists sometimes draw a distinction between observable categories and verifiable ones, and the enforcement of a well-functioning trade agreement relies on verifiability, not just a general feeling that the other partner is failing to cooperate. There simply isn't an easy way to "catch China red-handed," even if highly objectionable policies continue or accelerate.

What about well-established rules like those of the World Trade Organization? They are not much help, either. No matter what happens, there will still be debates about just how much China's policies are compatible with the letter or spirit of WTO rules. China's trade practices have been going on since well before China joined the WTO, and the WTO adjudication process won't settle matters. The more relevant point, now and in the future, is whether the Trump administration is unhappy.

The issue will still be enforceability in a situation with relatively few clear metrics. If a China trade agreement were in place, no matter what it said, it would still be hard for the U.S. to call out China for lack of compliance on many issues, much less prove the case.

On the other side of the agreement, what the Chinese want is relatively easy to identify and enforce: They would like to see some version of the status quo continue—which is to say, they do not want the U.S. to levy high tariffs on Chinese imports.

This asymmetric difficulty of enforcement helps explain at least two features of the bargaining. First, the Trump administration wants to keep at least some of the tariffs on Chinese products in place, even after an agreement is struck. That doesn't make economic sense—isn't the whole point of a trade agreement to lower tariffs?—but it is more understandable in view of the enforcement difficulties any deal would present. Having the right to keep some of its tariffs in place would allow the U.S. to keep some of its leverage.

Second, Trump has single-mindedly focused on reducing the U.S. trade deficit with China, even though economists insist on telling him that he is wrong. That is one of the few concrete demands the U.S. can make and actually enforce. The bilateral trade deficit is a measurable number, and setting a goal of reducing it gives China some incentives to reorganize their purchasing and order more U.S. goods. (Ironically, this very change would require China to increase state control over its economy, the opposite of America's larger objective.)

If a trade agreement is concluded, then, it is likely to have two parts: the parts that are easy to enforce, and the parts that aren't. To the extent that the U.S. insists on greater Chinese compliance on the easier parts, a self-interested China will respond by shifting more trade onto the difficult-to-enforce parts of the agreement.

The tug of war will never cease. Trump will continue to tweet and move markets. The Chinese will continue to organize their economy to maximize state control. And maybe, over time, we will all recognize the broader truth: In a highly legalistic world, vague and hard-to define-strategies offer a competitive advantage.

Getting Started/Comments Policy

Getting started

  1. 1. If you frequently comment on news websites then you may already have a Disqus account. If so, click the "Login" button at the top right of the comment widget and choose whether you'd rather log in with Facebook, Twitter, Google, or a Disqus account.
  2. 2. If you've forgotten your password, Disqus will email you a link that will allow you to create a new one. Easy!
  3. 3. If you're not a member yet, Disqus will go ahead and register you. It's seamless and takes about 10 seconds.
  4. 4. To register, either go through the login process or just click in the box that says "join the discussion," type your comment, and either choose a social media platform to log you in or create a Disqus account with your email address.
  5. 5. If you use Twitter, Facebook or Google to log in, you will need to stay logged into that platform in order to comment. If you create a Disqus account instead, you'll need to remember your Disqus password. Either way, you can change your display name if you'd rather not show off your real name.
  6. 6. Don't be a huge jerk or do anything illegal, and you'll be fine.

Texarkana Gazette Comments Policy

The Texarkana Gazette web sites include interactive areas in which users can express opinions and share ideas and information. We cannot and do not monitor all of the material submitted to the website. Additionally, we do not control, and are not responsible for, content submitted by users. By using the web sites, you may be exposed to content that you may find offensive, indecent, inaccurate, misleading, or otherwise objectionable. You agree that you must evaluate, and bear all risks associated with, the use of the Gazette web sites and any content on the Gazette web sites, including, but not limited to, whether you should rely on such content. Notwithstanding the foregoing, you acknowledge that we shall have the right (but not the obligation) to review any content that you have submitted to the Gazette, and to reject, delete, disable, or remove any content that we determine, in our sole discretion, (a) does not comply with the terms and conditions of this agreement; (b) might violate any law, infringe upon the rights of third parties, or subject us to liability for any reason; or (c) might adversely affect our public image, reputation or goodwill. Moreover, we reserve the right to reject, delete, disable, or remove any content at any time, for the reasons set forth above, for any other reason, or for no reason. If you believe that any content on any of the Gazette web sites infringes upon any copyrights that you own, please contact us pursuant to the procedures outlined in the Digital Millennium Copyright Act (Title 17 U.S.C. § 512) at the following address:

Copyright Agent
The Texarkana Gazette
15 Pine Street
Texarkana, TX 75501
Phone: 903-794-3311
Email: webeditor@texarkanagazette.com