FAIRFAX, VIRGINIA – It is too early to give a final assessment of the U.S.-China trade deal, the details of which have just been published, but it’s not too soon for a provisional opinion: China is badly shaken, and American credibility has been greatly enhanced.
Some parts of the deal probably won’t matter much. First, taking away the currency manipulation charge is a non-event, and to the extent China was manipulating its currency, it was keeping it up, not down. Second, it is fine that China agreed to respect more intellectual property rights, but that can be hard to enforce and in any case China has been headed in that direction. Third, it is good that China is opening further to U.S. financial services, but that is a marginal change.
In general, I am suspicious of detailed agreements when one of the parties claims the other does not respect the terms of their deals, as the United States does with China. If the U.S. holds up its end of the bargain and China doesn’t, you have to wonder what all the trouble was about.
So what about the potential benefits for the U.S.? Most of them concern credibility.
The U.S. has established its seriousness as a counterweight to China, something lacking since it largely overlooked China’s various territorial encroachments in the 2010s. Whether in economics or foreign policy, China now can expect the U.S. to push back — a very different calculus. At a time when there is tension in North Korea, Hong Kong, Taiwan and the South China Sea, that is potentially a significant gain.
U.S. President Donald Trump’s tariffs did hurt U.S. consumers, and while that is indeed an economic cost of the deal, it is also a credibility benefit. It shows that the U.S. is in fact willing to incur some pain to oppose China, contrary to the common Chinese view that Americans are “soft.” U.S. credibility has also been improved among its allies and some neutral nations.
A case in point: Currently the U.S. is working hard to keep Huawei equipment out of the forthcoming 5G networks in many countries. (Imagine letting the KGB run the American phone network in say 1980, and you can see what is at stake here.) For that campaign to succeed, even partially, the U.S. needs some credible threats of punishment, such as withholding intelligence or even defense protection from allies. The course of the trade war has made those threats more plausible. If you are Germany, and you see that the U.S. has been willing to confront the economic and military power of China directly, you will think twice about letting Huawei into your network.
A third set of possible benefits relates to the internal power dynamics in the Chinese Communist Party. For all the talk of his growing power, Chinese President Xi Jinping has not been having a good year. The situation in Hong Kong remains volatile, the election in Taiwan did not go the way the Chinese leadership had hoped, and now the trade war with America has ended, or perhaps more accurately paused, in ways that could limit China’s future expansion and international leverage. This trade deal takes Xi down a notch, not only because it imposes a lot of requirements on China, such as buying American goods, but because it shows China is susceptible to foreign threats.
The U.S. still is keeping $360 billion of tariffs on Chinese goods, hardly a propitious sign that China made a great bargain. There is even speculation that China will not report the full deal to its citizens.
It is entirely fair to point out, as many do, that this trade war does not benefit America directly (e.g., tariffs are mostly bad). But the point remains that China, and Xi in particular, have been shown to be vulnerable. Many Chinese may now question whether ever greater authoritarianism is the best path forward.
It is a common argument that being tough with other countries strengthens the hard-liners in those countries. But in China the hard-liners had been growing in power and influence anyway. This trade war, and the resulting first phase of a trade deal, shows there is a cost to China for being so hard line.
It is too soon to judge the current trade deal a success from an American point of view. Nevertheless, its potential benefits remain underappreciated, and there is a good chance they will pay off.
Tyler Cowen is a Bloomberg Opinion columnist. He is a professor of economics at George Mason University and writes for the blog Marginal Revolution.