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PODCAST: What You Need to Know About New US-China Trade Deal

Will the new deal boost the American economy? Is it normal for a trade deal to demand one party spend a certain amount? Will it curb China’s theft of intellectual property from U.S. companies? Riley Walters, a policy analyst at The Heritage Foundation who focuses on Asia’s economy and technology, has answers. Read a lightly edited transcript of the interview, posted below, or listen on the podcast:

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Kate Trinko: On Wednesday, President Donald Trump signed a new trade deal with China. … Joining me to discuss this deal today is Riley Walters, a policy analyst at The Heritage Foundation who focuses on Asia’s economy and technology. Riley, thanks for joining us.


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Riley Walters: Thank you for having me.

Trinko: Before we get into the new trade deal, I actually want to roll back the clock a little bit. We’ve seen a lot of tension between President [Donald] Trump and China over trade during his presidency. How intense have the negotiations and the fights been? And does that color how we should look at this new deal?

Walters: I think if you look at the last couple of years of negotiations between Washington and Beijing, you see a lot of back and forth. There was certainly some times when it seemed like negotiations were going well, both sides seemed to have been making progress. But there were clearly some times where things fell out of line. During those turbulent times you’d see exculpatory efforts on both sides by imposing new tariffs and such like that.

Last year, I think it was last year around May, we saw probably the biggest dispute between the two sides and it almost seemed like negotiations fell apart completely, almost as if they weren’t going to go anywhere from there.

So I think what we see today is a complete 180. I mean, we have a deal now, right? And so this, I think, marks the point where we sort of returned to some sort of level of normalcy between the United States and China on economic and trade issues. And so I think it’s good.

Obviously, this is just phase one of a two-phase deal and so over the next year we should hopefully see a lot more progress.

Trinko: OK. So, our listeners won’t know this, but when Riley came to the studio, he had a huge sheath of papers with all the details, so obviously this trade deal is very complicated. But could you break down for us, what are some of the highlights and key things that people should know about the trade deal?

Walters: So, it’s almost a 100-page document. It gets into some very technical trade and legalese issues. It touches on a variety of issues.

I mean, there are roughly eight chapters in this text … touching on everything from the protection of intellectual property and trade secrets [to] reducing technology transfers from American companies to Chinese entities. It touches on exchange rates and increase in trade efforts. It touches on a whole variety of things.

Throughout the document there are new metrics, dates by which certain government officials need to have certain reports. There are certain trade measures. For example, China needs to purchase over the next two years an additional $200 billion worth of a variety of American goods.

And, of course, there are communications that are set up, dialogues that are making sure that this agreement goes into force, that every part of the agreement is disputable to some extent, and, of course, this has been agreed to on both sides.

So what is in this document right now is the new policy. I would actually say this is probably the most comprehensive trade agreement we’ve had with China since their joining of the WTO [World Trade Organization] 20 years ago. So this is pretty significant.

Trinko: You mentioned that the deal requires China to buy $200 billion worth of additional goods over the next couple of years. I am not an expert on trade deals. Is it normal for a deal to include this kind of mandatory buy with it? And what do you think about this provision?

Walters: This is not normal. This is certainly something new generally. So I think this is actually probably one of the few things that’s covered regularly in the news, is this $200 billion in additional purchases by China over the next two years.

What they’re supposed to do is buy $200 billion in addition to what they bought in 2017, which was roughly $190 billion worth of goods and services from the United States.

So, for the rest of this year and all of next year, they need to buy roughly $390 billion worth of goods and services, and those break down by industries, manufactured goods, agricultural energy, etc.

But again, this is not normal. This is not something you usually find in trade agreements because trade agreements are usually about removing barriers. It’s about removing the tariffs or taxes on imports that countries maintain. It’s about removing regulatory barriers.

… For example, biochemical restrictions or chemical or scientific restrictions on agricultural products, removing those so that the goods that we trade are free from restriction.

This is different. This sets up a sort of a mandatory “you must buy,” and there are going to be a lot of questions about how China does this.

Who in China is actually going to start buying these goods, right? Is it through state-owned enterprises? Is it “private Chinese companies” at the behest of the Chinese government? And, of course, the question of whether the United States can actually provide these goods.

There’s going to be a lot of, I think. questions about just the way that this is actually implemented.

Trinko: OK. So the deal reduced some tariffs. It also eliminated some other potential tariffs that could have been coming down the pipeline. Overall, did you think what the deal did for tariffs made sense or didn’t, and if so, why?

Walters: As a part of this deal, there will be some tariffs that remain in place by this administration. They are going to keep a 25% additional tariff or import tax on roughly $250 billion worth of goods and a 7.5% tariff tax on roughly $120 billion worth of imports from China. So all those will roughly remain.

The president said he’s more than willing to get rid of those as part of a phase-two deal. We don’t know when the phase-two deal could happen. Some suggest 10 months, it could be longer, especially things could change if the election outcome changes. And so those will remain in place for at least the next year or so.

There’s been no reports about how China will be decreasing its import taxes. Obviously, they too have been implementing their own tariffs over the last couple of years in retaliation to the United States. But that’s going to be, I think, what to expect for at least the next year.

Trinko: Did this deal address intellectual property concerns at all? Obviously, there’s been a lot of concern that China is taking intellectual property from U.S. companies. Does this address that?

Walters: It does. The first two chapters are 21 pages long. They address intellectual property protection or trade secret protections and technology transfer.

Not to get too much into detail, but basically it says China will protect American intellectual property, our trade secrets, the things that actually make companies profitable and want to invest in and do business. And they won’t require American companies or entities to transfer their sensitive technology to Chinese entities for any reason.

Sometimes in China you hear stories of American companies who want to get into China, they are by law sometimes required to enter into a joint venture with a Chinese company. And then the Chinese company says, “Well, if you want to make the deal, we need to have access to your intellectual property.”

So that’s supposed to no longer happen. We will see, of course, over the next a year or so whether that’s true or not.

And there are some other interesting changes in how American companies can sort of fight their legal case in China when they feel that their intellectual property has been stolen. So some real interesting stuff there. Again, we’ll have to see whether it actually produces anything of substance. But I think on paper at least it’s a positive step.

Trinko: I know you don’t have a crystal ball to see America’s economic future, but how would you guess this deal would or wouldn’t affect the U.S. economy?

Walters: One of the couple of things that are a drag on the U.S. economy right now, not, of course, pushing us into recession, I mean, there’s a lot of positive economic activities that the Trump administration has helped with over the last couple of years, but a couple of the drags are the fact that tariffs will be remaining on over $300 billion worth of goods.

The silver lining is that U.S. trade with China only makes up roughly 3% of our GDP [gross domestic product] so it’s not that significant. I mean, it is hundreds of billions of dollars worth of goods. The Trump administration has collected roughly $43 billion in new taxes from Americans who import from China. So that is a cost.

But I think one of the biggest gains from this, and it’s going to be harder to actually quantify, is the uncertainty it removes. I think the trade deal today brings back a lot of certainty. I think anyone who thought the Trump administration’s goal is to decouple from China, with this deal, I think that idea is dead.

This deal is building a new U.S.-China economic relationship, I think for good cause, too. And so this will bring a lot of certainty back to our economic relationship.

Trinko: And how do you think it might affect China’s economy?

Walters: Again, same way. I think perhaps marginally, a positive marginal.

They themselves have a lot of domestic issues that they need to take care of. Looking forward toward the way that debt is accumulated in China, the way that their demographics are shaping up, the fact that, as a part of phase two, we’re going to have to negotiate a lot of sensitive issues like state-owned enterprises and the support that they get from the government and how those not just affect the U.S. economy, but how they negatively affect the Chinese economy as well.

Trinko: OK. Riley Walters, thanks so much for joining us.

Walters: Thank you.

COLUMN BY

Katrina Trinko

Katrina Trinko is editor-in-chief of The Daily Signal and co-host of The Daily Signal PodcastSend an email to Katrina. Twitter: @KatrinaTrinko.

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Government Caused the ‘Great Stagnation’ by Peter J. Boettke

Tyler Cowen caused quite a stir with his e-book, The Great Stagnation. In properly assessing his work it is important to state explicitly what his argument actually is. Median real income has stagnated since 1980, and the reason is that the rate of technological advance has slowed. Moreover, the technological advances that have taken place with such rapidity in recent history have improved well-being, but not in ways that are easily measured in real income statistics.

Critics of Cowen more often than not miss the mark when they focus on the wild improvements in our real income due to quality improvements (e.g., cars that routinely go over 100,000 miles) and lower real prices (e.g., the amount of time required to acquire the inferior version of yesterday’s similar commodities).

Cowen does not deny this. Nor does Cowen deny that millions of people were made better off with the collapse of communism, the relative freeing of the economies in China and India, and the integration into the global economy of the peoples of Africa and Latin America. Readers of The Great Stagnation should be continually reminded that they are reading the author of In Praise of Commercial Culture and Creative Destruction. Cowen is a cultural optimist, a champion of the free trade in ideas, goods, services and all artifacts of mankind. But he is also an economic realist in the age of economic illusion.

What do I mean by the economics of illusion? Government policies since WWII have created an illusion that irresponsible fiscal policy, the manipulation of money and credit, and expansion of the regulation of the economy is consistent with rising standards of living. This was made possible because of the “low hanging” technological fruit that Cowen identifies as being plucked in the 19th and early 20th centuries in the US, and in spite of the policies government pursued.

An accumulated economic surplus was created by the age of innovation, which the age of economic illusion spent down. We are now coming to the end of that accumulated surplus and thus the full weight of government inefficiencies are starting to be felt throughout the economy. Our politicians promised too much, our government spends too much, in an apparent chase after the promises made, and our population has become too accustomed to both government guarantees and government largess.

Adam Smith long ago argued that the power of self-interest expressed in the market was so strong that it could overcome hundreds of impertinent restrictions that government puts in the way. But there is some tipping point at which that ability to overcome will be thwarted, and the power of the market will be overcome by the tyranny of politics. Milton Friedman used that language to talk about the 1970s; we would do well to resurrect that language to talk about today.

Cowen’s work is a subversive track in radical libertarianism because he identifies that government growth (both measured in terms of scale and scope) was possible only because of the rate of technological improvements made in the late 19th and early 20th century.

We realized the gains from trade (Smithian growth), we realized the gains from innovation (Schumpeterian growth), and we fought off (in the West, at least) totalitarian government (Stupidity). As long as Smithian growth and Schumpeterian growth outpace Stupidity, tomorrow’s trough will still be higher than today’s peak. It will appear that we can afford more Stupidity than we can actually can because the power of self-interest expressed through the market offsets its negative consequences.

But if and when Stupidity is allowed to outpace the Smithian gains from trade and the Schumpeterian gains from innovation, then we will first stagnate and then enter a period of economic backwardness — unless we curtail Stupidity, explore new trading opportunities, or discover new and better technologies.

In Cowen’s narrative, the rate of discovery had slowed, all the new trading opportunities had been exploited, and yet government continued to grow both in terms of scale and scope. And when he examines the 3 sectors in the US economy — government services, education, and health care — he finds little improvement since 1980 in the production and distribution of the services. In fact, there is evidence that performance has gotten worse over time, especially as government’s role in health care and education has expanded.

The Great Stagnation is a condemnation of government growth over the 20th century. It was made possible only by the amazing technological progress of the late 19th and early 20th century. But as the rate of technological innovation slowed, the costs of government growth became more evident. The problem, however, is that so many have gotten used to the economics of illusion that they cannot stand the reality staring them in the face.

This is where we stand in our current debt ceiling debate. Government is too big, too bloated. Washington faces a spending problem, not a revenue problem. But too many within the economy depend on the government transfers to live and to work. Yet the economy is not growing at a rate that can afford the illusion. Where are we to go from here?

Cowen’s work makes us think seriously about that question. How can the economic realist confront the economics of illusion? And Cowen has presented the basic dilemma in a way that the central message of economic realism is not only available for libertarians to see (if they would just look, or listen carefully to his podcast at EconTalk), but for anyone who is willing to read and think critically about our current political and economic situation.

The Great Stagnation signals the end of the economics of illusion and — let’s hope — paves the way for a new age of economic realism.

This post first appeared at Coordination Problem.

Peter J. BoettkePeter J. Boettke

Peter Boettke is a Professor of Economics and Philosophy at George Mason University and director of the F.A. Hayek Program for Advanced Study in Philosophy, Politics, and Economics at the Mercatus Center. He is a member of the FEE Faculty Network.

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Trade War: U.S. Chamber and AFL-CIO Square Off On TPA Renewal

Geographically the headquarters of U.S. Chamber and the AFL-CIO are only a block apart. But philosophically on trade policy they’re light years apart.

Although friends, the U.S. Chamber President and CEO Tom Donohue and AFL-CIO President Richard Trumka squared off on opposite sides at a Senate Finance Committee hearing on TPA renewal and forging ahead with trade agreements like the Trans-Pacific Partnership (TPP).

For Donohue, not renewing TPA and passing trade agreements like TPP “is the equivalent of going out and resigning from the rest of the world.” But for Trumka, TPA–he calls it, “fast track”–is an “outdated and undemocratic process.”

One particular person interested in this conversation on Capitol Hill happens to also work near both men. But President Obama would have to read the coverage later. He was in Fairfax, Virginia for an interview about TPA and trade to be aired later on MSNBC.

Trumka had three main arguments.

First, he complained that the TPP cake has already been baked and TPA won’t give Congress much of a say:

The idea that fast track lets Congress set the standards and goals for the TPP is a fiction – the agreement has been under negotiation for more than five years and is essentially complete. Congress cannot set meaningful negotiating objectives in a fast track bill if the administration has already negotiated most of the key provisions.

But that’s just not the case, Donohue said:

The Trans-Pacific Partnership agreement would open the Asia-Pacific dynamic markets to American goods and services. It is critical that we do so because nations across the Pacific are clinching their own trade agreements that exclude the United States, denying American exporters access to these very important markets.

TPA gives the United States a strong hand in writing the rules for trade for this important region. It makes us an active player, not a bystander stuck on the outside looking in.

TPP would affirm and deepen America’s ties to Asia at a time when there is a perception that we’re pulling back.

Second, Trumka charged that TPA is undemocratic:

[TPA] cedes important and long-lasting decisions about our economy to a few negotiators in a small room in the middle of the night. This is undemocratic. It’s wrong.

The truth is because Congress sets the terms for negotiation and must vote a trade agreement up or down it’s inherently democratic. Negotiators don’t impose anything on Congress.

Donohue address this point:

TPA is based on the common sense notion that Congress and the White House must work together on trade agreements. TPA is how Congress sets priorities and holds the administration accountable in trade negotiations.

A few people have claimed that this is a presidential power grab. I may be uniquely qualified to comment on this. After all, the Chamber has not been shy about criticizing some actions of the administration when we see overreach. But TPA isn’t about Congress ceding power to the president. On the contrary, TPA strengthens the voice of the Congress on trade.

Without TPA, the administration can pursue its priorities at the negotiating table and consult with Congress only when and if it chooses. TPA lets Congress set negotiation goals and sets forth detailed requirements for consultation between the trade negotiators and the Congress.

What TPA does is prevent Congress from acting like 538 additional trade negotiators, as Senator John Cornyn (R-Texas) described it. That would be no way to forge a 21st Century trade agreement.

Third, Trumka argued that TPA lacks accountability. “Congress should have the final say on whether negotiating objectives have been met.,” Trumka told the committee.

But that’s what TPA does. From Donohue’s testimony:

TPA allows Congress to show leadership on trade policy by doing three important things: (1) It allows Congress to set negotiating objectives for new trade pacts; (2) it requires the executive branch to consult extensively with Congress during negotiations; and (3) it gives Congress the final say on any trade agreement in the form of an up-or-down vote. The result is a true partnership stretching the length of Pennsylvania Avenue.

The TPA process has produced beneficial trade agreements, Donohue noted:

[Previous] trade agreements boosted U.S. output by more than $300 billion and in turn supports an estimated 5.4 million U.S. jobs….

The United States has a trade surplus with its 20 trade agreement partners as a group. This includes sizeable trade surpluses in manufactured goods, services, and agricultural products.

American companies have greater access to international markets and are creating jobs. At the same time, American consumers have access to a wider array of goods and services. Renewing TPA will lead to more beneficial trade agreement like TPP and the Transatlantic Trade and Investment Partnership (TTIP) with the European Union.

As Donohue summed up his testimony, “To create the jobs, growth, and prosperity our children need, we need to set the agenda. Otherwise, our workers and businesses will miss out on huge opportunities.”

TELL CONGRESS TO PASS TPA.

Meet Sean Hackbarth  @seanhackbarth Follow @uschamber