“Today we take a momentous step, one that has never been taken before with China, towards a future of fair and reciprocal trade,” Trump said. He called it a “sea change in international trade.”
At the signing, Chinese Vice Premier Liu He read a letter from Chinese leader Xi Jinping, who said the deal reflects “mutual respect” between the two countries. The letter said Xi hoped the U.S. would “treat fairly” Chinese companies that attempt to do business with U.S. firms.
A key component of the new deal will be China’s commitment to purchase an additional $200 billion in American exports above previous levels.
The Chinese have agreed to dollar targets for services as well as farm, energy and manufactured goods. New sales for American farmers alone are expected to near $40 billion in the first year, up from $24 billion.
Robert E. Lighthizer, the president’s chief trade negotiator called the deal an “amazing agreement” and “real reform.”
The administration is not making public all details of the agreed Chinese purchases, but it did list specific targets for a range of industries in 2020 and 2021.
That is unusual for a U.S. trade agreement and is just the latest indication of how Trump’s embrace of “managed trade” is breaking new ground.
“Trump has shattered orthodoxy on trade right and left since 2017,” said Claude Barfield, a former U.S. trade official now with the American Enterprise Institute. “. . . It leaves the U.S. open to charges of hypocrisy on state capitalism and government intervention.”
A key plank of Trump’s 2016 presidential campaign was a vow to force Beijing to change its economic policies, which the president said have disadvantaged U.S. workers and companies for decades. The “phase one” trade deal to be signed on Wednesday stops short of some of the structural changes to Beijing’s economy that Trump sought, but the White House has highlighted provisions that will require China to purchase more U.S. goods and services, a change Trump has promised will be a boon to U.S. companies before the November election.
The avalanche of spending will mark a huge increase over the $128 billion China devoted to American goods in 2017, the year American officials are using as a baseline, Lighthizer told reporters last month.
The president has boasted about his interventionist approach on the campaign trail.
“My people wanted $20 billion in purchases. That’s a lot of money. That’s a lot of corn. Twenty billion dollars. And I said, ‘Make it 50,’ ” Trump said in Toledo earlier this month. “And China heard me, and they said okay.”
Trump’s eagerness to shape trade flows to benefit American workers has been a central feature of his “America First” stance. In 2018, South Korea agreed to limit its steel exports to the United States to 70 percent of their previous volume — good news for U.S. steelmakers but a costly change for South Korea’s American customers.
Likewise, the new U.S.-Mexico-Canada Agreement contains specific wage and plant localization requirements designed to steer additional manufacturing work to the United States.
Along with the broadest use of tariffs since the 1930s, Trump established a cumbersome government process to weigh requests from companies seeking permission to continue importing the affected goods without paying the new levies.
“This administration is more open to intervening in the economy than most recent Republican administrations have been,” said John Veroneau, a deputy U.S. trade chief under President George W. Bush and now a partner at Covington & Burling.
The president’s decision to direct trade outcomes rather than rely on free-market competition represents a sharp break with a quarter-century of bipartisan trade policy. But it is not without precedent.
In the 1980s, when Lighthizer was a young Reagan administration official, he helped negotiate voluntary export limits with the Japanese.
In the 1994 Uruguay Round of trade talks, which led to the creation of the World Trade Organization, the United States and more than 100 other nations agreed to outlaw such agreements as a distortion of global trade flows and a threat to the multilateral rules-based system.
The president is opting to manage trade directly, rather than trust the vagaries of the market, in hopes of achieving one of his main goals: reducing the chronic gap between the enormous amount that Americans buy from China and the smaller figure that Chinese customers spend on U.S. products.
In 2018, the most recent year for which full data is available, the U.S. merchandise trade deficit with China topped $419 billion, according to the Census Bureau.
China’s promise to buy specific amounts of U.S. exports also may be easier to enforce than pledges to change its protections for intellectual property or joint venture licensing arrangements, which invite endless legal wrangling, said William Reinsch, a trade specialist at the Center for Strategic and International Studies.
“This is how you make sure they do what they say: Get them to make quantitative commitments,” Reinsch said. “They tend to do that because it’s really, really obvious when they don’t.”
The administration’s embrace of government mandates comes as Lighthizer seeks allied support for combating other forms of state involvement in the economy. On Tuesday, he met in Washington with Phil Hogan, the European Union’s trade commissioner, and Hiroshi Kajiyama, the Japanese trade minister, “to tackle market and trade distorting subsidization,” according to an administration statement.
China’s widespread use of industrial subsidies has been a long-standing U.S. complaint and one that the president initially hoped to resolve in the negotiations that produced the “phase one” deal. Instead, potential limits on such government aid — in the form of discounted loans, energy or land — now await future talks.
But at least in the short run, China is likely to steer orders away from current suppliers to satisfy U.S. demands. That means U.S. officials could be seeking diplomatic help from governments in Europe or from Japan, where corporations are losing sales thanks to the U.S.-China deal, Barfield said.
Lighthizer said last month that the purchases spelled out in the deal are “completely compliant with the WTO.”
Some analysts have questioned whether China has the capacity to increase its American purchases so sharply. Chinese officials publicly have sought some wiggle room, saying any new orders must be based on “market conditions.”
How much of a loophole that language represents will not be clear until the text is released.
But Clete Willems, who helped negotiate the deal as a White House official, said there is ample room for China to ramp up its U.S. imports. The deal’s dollar targets are less important than the changes it requires in Chinese agricultural regulations, which should lead to billions of dollars in new sales for American pork, beef and chicken, he said.
“It really is the lasting policy changes that will make a difference,” said Willems, a partner at Akin Gump.
Wendy Cutler, a former trade negotiator and vice president of the Asia Society Policy Institute, said affected countries may complain to the WTO about an impermissible diversion of trade. And Chinese officials will need to satisfy U.S. demands for rising orders and keep current suppliers happy even as the nation’s economy slows.
“China’s going to have to navigate through this,” she said.
If the new trade deal seems to conflict with standard U.S. pro-market rhetoric, it also shines an uncomfortable light on China’s self-image. Beijing has repeatedly complained to the WTO that it deserves formal recognition as a “market economy.” Yet it is now accepting the notion that its negotiators can make commitments on behalf of Chinese businesses.
In reality, China’s government exerts enormous influence over the economy through state banks, control of land and restrictions on individual movement. Government agencies in recent years have accounted for more than 40 percent all goods imports, excluding those controlled by foreign corporations, according to economist Nicholas Lardy of the Peterson Institute for International Economics.
Government bodies are particularly involved in buying foreign energy and agricultural products, two of the sectors featured in the trade deal, and purchase 100 percent of all civil aircraft, Lardy said.
Administration supporters say the trade deal marks a significant departure from previous negotiations that failed to curb Chinese trade practices. The president launched his trade offensive in March 2018, citing China’s rampant theft of American trade secrets and coercive technology licensing requirements.
“In the long term, obviously everyone wants to see more-efficient markets. But in the short run, it’s reasonable for the administration to encourage China to buy more exports from the United States,” said Stephen Vaughn, a partner at King & Spalding. “It’s a pragmatic approach by the administration, recognizing the reality of China’s economic system.”
The president’s enthusiasm for managed trade will be tested when attention shifts to the E.U., his next trade target. The United States is threatening tariffs over a French tax on Internet companies and German auto market restrictions. But whether the same tactics that worked with China will succeed with the Europeans remains to be seen.
“These are market economies,” said Barfield, “so they would have trouble with that.”