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Trump’s trade deal with China is communism with American characteristics

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  • Tim Fernholz
By Tim Fernholz

Senior reporter

Published Last updated on

Republicans, who for years held themselves as champions of free markets, embraced central planning in a new trade deal with China.

The so-called “phase 1 trade deal” (pdf) with China was released to the public and signed yesterday by US president Donald Trump and Chinese vice premier Liu He. It is safe to say the substance underwhelmed anyone looking for more than a sign that the world’s two largest economies are behaving amicably.

The fracas started after Trump imposed new import taxes on American consumers and businesses buying goods from China, and Beijing in turn placed tariffs of its own on US exports. Trump was concerned about the trade deficit between the US and China, and that China’s government and corporate powers were stealing US technology.

This deal will do little to resolve those concerns. “A huge amount of this is a reset,” says Chad Bown, a senior trade economist at the Peterson Institute for International Economics.

The deal will still keep in place two-thirds of Trump’s new taxes on US importers, and China has made no commitments to cut its own tariffs. China’s state subsidies for ostensibly private companies aren’t mentioned in the deal. Minor changes in China’s investment rules date back to negotiations conducted by the Obama administration.

The biggest outcome of the agreement is that at the request of the White House, the Chinese government will direct its companies to purchase some $200 billion of goods and services from the US, rather than attempting to set fair trade rules for competition.

“This is as if the administration is in some sense saying … we’ve given up on attempting for you to become more market oriented, we want you to direct your purchases toward us and these are the commitments we expect you to make,” Bown says.

It’s not clear yet whether those new purchases would exceed the amount expected without the previous years of trade disruption, or if demand for the goods in China will match up with the supply of them in the United States.

Trump’s decision to buy into China’s conception of state-planned trade is an anomaly. Since the US and China re-established relations under president Nixon, a goal of the US has been to push the state toward a more liberal economy and political system.

That strategy has led to China’s modern conception of state-centric capitalism, and little political reform—one reason why US critics of all political stripes aren’t thrilled with the relationship between the two powers.

Now, China is gaining the upper hand by the exact strategy the US sought to use with the Trans-Pacific Partnership (TPP), a proposed trade agreement negotiated by the Obama administration in 2015. It was designed in part to coerce China into affirming a rules-based international trading system. Instead, China has used the current trade dispute to force the US into adopting its approach to state-planned trade.

“The Chinese are not going to change their economic model to appease the United States,” Edward Alden, a fellow at the Council on Foreign Relations, told Bloomberg

Democrats running for the presidency in 2020 promise to put more pressure on China because of their more overt commitments to including human rights in the relationship with China. Trump, instinctively sympathetic to authoritarian regimes, hasn’t made freedom from prosecution or from government control of business part of his agenda.

“Trump talks about material interests, not politics,” a former Chinese trade official, Long Yongtu, told the South China Morning Post last year. “Such an opponent is the best choice for negotiations.”

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