Why Trade Wars Don’t Work

Thursday, in a post on the “phase one” trade deal with China, I predicted:

As new information comes out, I expect the deal to look even weaker, even more porous.

And Friday we have confirmation:

Donald Trump says China will spend $50 billion a year for U.S. farm products as part of a “phase one” trade deal between the countries. But doubts are surfacing whether that’s even possible, bolstered by China’s reluctance to confirm the figure. . . .

Prices for soybeans and hogs initially surged Friday as the deal was announced, but later retreated after Chinese officials said their imports would increase by “a notable margin,” but refused to be more specific. . . .

Lighthizer suggested that the higher figure is aspirational. He told reporters Friday that China has agreed to raise its annual purchases of U.S. agricultural goods to $40 billion annually for the next two years and make its best efforts to reach $45 billion per year. Beijing agreed to specific benchmarks for individual commodities but those will be classified, he added. The goals will be re-examined after that, a U.S. trade official said. . . .

China won’t buy agricultural products from U.S. producers to meet the target if it can purchase them for less from competitors such as Brazil, the person said.

“Aspirational”?  Hmm. While I don’t doubt that China’s food purchases will increase substantially from the recent depressed levels, there is reason to doubt whether this will dramatically improve farm incomes:

Extra shipments to China could crowd out export customers in Europe and the rest of the world, forcing them to turn to Brazil for supplies in a mirror image of trade flows that occurred during the tariff war, said Richard Feltes, vice-president at RJ O’Brien, a commodities broker.

Mr Glauber said China’s commitments could draw scrutiny from other food exporting countries that may question “whether US products have been guaranteed preferential access” for tariff-rate quotas that are supposed to be applied on a most-favoured nation basis under global trade rules.

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