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Remember the U.S. trade war with China that started a few years ago, the one where each country raised tariffs on products imported from the other country again and again? Well, almost exactly a year ago, the trade war was put on pause because of an agreement that the two countries reached with each other.
Chad Bown is a trade economist at the Peterson Institute.
CHAD BOWN: This trade agreement that the Trump administration negotiated with China was unprecedented.
GARCIA: Most of the time, when two countries reach some kind of trade agreement, they will usually lower trade barriers like tariffs. But then they let the markets decide how much trade goes on afterwards. But under this agreement from a year ago between the U.S. and China, China had promised that it would buy $200 billion more of U.S. goods than China had been buying before the trade war started.
BOWN: In reality, the only way you can get to $200 billion legally is if the Chinese government guarantees it - right? - which is a state-driven decision. It's not markets.
GARCIA: Chad says there had never been a trade deal like this one, where one side agreed to specifically buy hundreds of billions of dollars more stuff from the other country. So when it happened, the U.S. stopped raising tariffs and even lowered some of its earlier tariffs. And China agreed to buy these American goods, which the U.S. had hoped would be good for U.S. businesses. Well, a year later, Chad has now crunched the data on whether China has actually followed through with its purchases of American products.
BOWN: China did not even get close. You know, it's not even 60% of the way toward where we would have expected it to be at this point.
GARCIA: Or to characterize the agreement a bit more bluntly...
BOWN: So far, it's on track to be an epic failure.
GARCIA: Today on the show, Chad explains what happened. What are the deeper economic lessons of an agreement like this one? And also, this agreement was made when Donald Trump was president. With the agreement falling short now, how does it complicate the way President Joe Biden approaches trade with China? All that after a break.
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GARCIA: Chad Bown, welcome back to THE INDICATOR.
BOWN: Thanks for having me.
GARCIA: So, Chad, we know now that China is falling short of spending as much money on American products as it had agreed to spend to buy. So give us some details. Which products is China not buying as much of as we might have expected based on the terms of the agreement?
BOWN: The one that everybody focuses on, I think, is soybeans. That's, you know, sort of been in the news the most. At the end of the day, China actually bought a fair amount of soybeans. It's just they didn't buy as an enormous an amount as the agreement had hoped it would buy, so I think that's the big one. The other two that really struck out to me, though, weren't in the farm sector at all that really got less attention. And those were things like airplanes and cars. So we sell, you know, tens of billions of dollars of airplanes every year to China and then cars. And those were particularly hard-hit starting in 2018 during the trade war, and they just really never recovered last year.
GARCIA: Yeah. And by the way, Chad, I got to ask, how much can we blame the pandemic for China not buying as much as it said it was going to buy?
BOWN: Look; it certainly contributed. The pandemic did hit China. It hit them first, and it hit them hard. But in terms of all of the economies out there in the world, China, I think, grew more than most last year. I think its growth rate was around 2.3% or so. So, yes, the pandemic certainly played a role, but it's not the entire explanation for why, you know, they didn't live up to the agreement.
GARCIA: Chad, one of the things that you've emphasized in your analysis of this trade deal is that there is something inconsistent, maybe even contradictory, between the nature of this agreement that the U.S. reached with China and the goals that the U.S. had been pursuing in the trade war in the first place. And there's an important economic lesson in that contradiction. So what do you mean by that?
BOWN: This agreement really was unique. We never see trade agreements that include these purchase commitments that they say they're going to buy this amount of money. And it's especially strange in the trade war context because one of the complaints that the U.S. has had with China is that it's not a market economy, that its state makes too many decisions. It doesn't let the private sector interact with markets enough. And so here you have the U.S. government telling the Chinese government, this is how much you want to buy. These are really big numbers. Well, the only way they're ever going to get close is if the Chinese government tells its companies, you know, don't go buy from somebody cheaper. You have to buy the stuff from the United States in order to live up to the deal. So it is very, you know, kind of inconsistent with what the overall U.S. policy - and being worried about China's not being a market economy and squaring those two things.
GARCIA: And, Chad, the Trump administration obviously negotiated this deal. And so far, we only know that the Biden administration is looking at the agreement anew, but we don't actually know what the Biden administration is going to do about it. And so given that China has not done what it promised to do, does the Biden administration have to do something about that? Or can it just kind of, like, let it go, just ignore it?
BOWN: If the United States government kind of ultimately lets this just slide without acknowledging that something has gone wrong, you know, this kind of would call into question all of America's trade agreements, right? If trading partners think that they can sign something on the dotted line, not come anywhere close to living up to its obligations and there's no penalty for it, you know, hey, that sounds great. So it's clear the Biden administration is going to have to do something here. They're going to have to renegotiate this - some element of this.
GARCIA: And finally, Chad, the Biden administration has also said that it's going to work with other countries, with U.S. allies in trying to figure out how to approach trade with China. But you said a second ago that this agreement with China essentially says that China needed to buy all these products from the U.S., which could in turn mean that China would be spending less money importing these same products from other countries, including from those same allies that the U.S. is trying to work with now. So how does an agreement like this one influence the way that other countries would think about partnering with the U.S.?
BOWN: Right now they think that all the United States cares about is getting China to buy more soybeans from us, more airplanes from us and not Airbus in Europe, more cars from us and not Japan. And if they think that, then they're not going to be as willing to work with us on the common trade issues with China as President Biden has said that he wants to do, right? He wants to work with allies. Well, in order to work with allies, you've got to get them to trust you. And right now they don't really trust the United States because they think all we care about is getting China to purchase our stuff and not theirs.
GARCIA: So what you're saying is that an agreement like this one goes directly against the interests of U.S. allies, and so that might undermine their willingness to be our allies, to work with us.
BOWN: That's exactly right. You know, if what they're concerned about is watching their back because they don't think the Americans are actually willing to work with them, they're not going to be willing to work with us either. And so I think this is the first thing that, you know, President Biden needs to convince these allies of; that we actually have their interests at heart as well.
GARCIA: Chad Bown, thanks so much.
BOWN: Thanks for having me.
GARCIA: This episode of THE INDICATOR was produced by Jamila Huxtable and fact-checked by Sam Tsai (ph). THE INDICATOR is edited by Paddy Hirsch, and it is a production of NPR.
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