Trade talks leave real issue untouched

Unfortunately, “postponed” might prove to be a far more accurate term.

The most notable concrete point on which the parties agreed is China’s commitment to “significantly increase purchases” of US products, principally energy and agricultural, in order to address the US demand that China reduce its $376 billion trade in goods surplus.

Such a move would address the current Administration’s fixation on the trade deficit and its tendency to view trade balances as a scorecard on whether a country is “winning” or “losing” in trade. But as most economists point out, the US trade deficit reflects a mismatch between savings and investment. In short, the US spends too much and doesn’t save enough. Unless or until that issue is addressed, any moves to decrease the trade deficit with China will only serve to transfer that deficit to other countries, rather than reducing in a significant way the size of the overall US trade deficit.

Not only does the focus on the trade deficit largely miss the point, it also takes us dangerously close to the territory of “managed trade”. Ideally, trade negotiations should be about eliminating barriers to market access and establishing effective and enforceable trade rules (emphasis on “effective” and “enforceable”). They should not be about arbitrarily divvying up slices of market share or extracting pledges of purchases based on political pressure rather than marketplace considerations. Such an approach flies directly in the face of the ostensibly free market, free trade policies which – despite their shortcomings – have produced seven decades of growth and historically unprecedented economic development across the world.

So, the agreement on purchases of US products is mostly a sideshow that fails to address the real issue: Friction-points are inevitably developing between China’s state-directed capitalism model, and the prevailing Washington Consensus philosophies that have defined the post-War global trade architecture. This “friction between systems” is evident in the steel dispute, which was caused by a global steel glut spawned by massive increases in subsidized Chinese production. Increasing tensions over intellectual property are another friction-point between the systems. They are the result of China’s government-planned industrial policies which aim to achieve – through massive government support and non-market behaviors –Chinese preeminence in 10 advanced technology sectors. The main outcome from the Washington meetings on these points is a vague pledge of future “cooperation”.

A ratcheting down in trade tensions between the US and China can only be viewed as a positive development, and so the recent agreement should be welcomed at least on that basis. But the real issue is the growing friction-points between these two different economic systems. And that won’t be solved by government mandated purchases of US products. Until the countries can seriously and meaningfully begin the process of working out a trade framework that can accommodate both systems, the possibility of a trade war has likely been postponed rather than averted. Negotiators have succeeded in cooling tensions. Now let’s get to the real work.

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