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Economy in Brief

Trade Negotiations – US Agrees To A Farm Package, Not Trade Deal With China
by Joseph G. Carson ([email protected])  October 14, 2019

After 18 months of negotiations, the trade talks ended with the US achieving very little. It is wrong to call this a "trade" deal, let alone a "substantial " one since the focus, almost exclusively, of the Trump Administration has been to reduce the trade imbalance and the agreement on farm purchases accomplishes little. It is also wrong to call it a trade "truce" since outstanding tariffs are still in place and future tariffs have not been rescinded. As such, Phase 1 of trade talks ended with many issues unsettled, leaving businesses and investors unsure on what lies ahead.

According to press reports, China has agreed to increase its purchases of US farm products up to $40 to $50 billion, although no timeline was offered. The US agreed to postpone a planned increase in tariffs scheduled to take effect on October 15, but let stand existing tariffs and did not remove the planned tariffs to take effect in December. Both sides agree to establish new rules to prevent currency manipulation (although the US designation of China as a currency manipulator still stands). Finally, it is reported that "progress" (no details) was made on intellectual property protection.

Remove for a second the two countries that are involved in these trade negotiations and just look at what has been announced. Country B has agreed to purchase $40 to $50 billion in farm products from Country A. On the surface, it would suggest that the bi-lateral trade deficit between the two countries is largely centered in agricultural goods and Country A has a comparative advantage (or a surplus) in farm (agricultural) goods. None of that is true.

In 2018, the bilateral merchandise trade deficit between US and China totaled $419 billion. Yet, trade in farm or agricultural goods reduced the overall trade deficit between the US and China. In 2018, the US exported $9.3 billion of agricultural goods to China and imported $4.9 billion, recording a small surplus of $4.4 billion in farm products.

In 2018, the gross output of the US farm sector totaled $380 billion, or about 1% of the gross output of all industries. Roughly one-third, or $133 billion of farm products were exported to all trading partners. Even if the US directed all of its agricultural exports to China it would only reduce the bilateral trade deficit by one-third. But that would not result in a lower overall US deficit as it merely increases, by a like amount, the US deficit with the rest of the world. In other words, shifting the direction of farm exports does not solve the US overall trade imbalance.

None of this is meant to downplay the important role of the farm economy, or to overlook the hardship the farm sector has experienced during the trade dispute between US and China.

Yet, the bilateral trade imbalance between the US and China involves many factors and the US needs to break away from the zero-sum thinking on China trade, because at the moment it is harming not helping US growth prospects.

Viewpoint commentaries are the opinions of the author and do not reflect the views of Haver Analytics.
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