The "first-phase" trade agreement reached between the United States and China included protection of intellectual property rights or a ban on Chinese government demands for forced technology transfers. But the most important features of the deal for the U.S. administration of President Donald Trump must be China's increased imports of U.S.-made agricultural goods and the decision to withhold punitive U.S. tariffs on Chinese-made smartphones -- because they both affect Trump's re-election chances in November.
At a recent news conference, Trump said China would buy $50 billion worth of farm products from the U.S. a year, urging American farmers to buy bigger tractors in order to expand their production. Before the trade war with the U.S. raged, China bought $24 billion worth of agricultural goods from the U.S. in 2017 -- so China will be doubling its imports.
But if indeed China is to expand its imports to levels well over real demand, the nation will likely end up building its stockpiles of imported goods, and it is doubtful whether it can actually buy such amounts of U.S. farm products each year. Trump is eager to emphasize his achievements on farm trade -- even by citing such unrealistic figures -- because farm votes matter in the 2020 presidential election. Trump needed to reach an agreement with China at this timing -- to be in time for the campaign for the November election to get into full swing.
In the U.S. presidential race, the results of most states are known even before the vote -- that, for example, the Democrats will take California and Texas will go to the Republican candidate. On the other hand, the outcome of about 10 swing states determines the overall result. Roughly half of those swing states -- such as Ohio, Michigan and Iowa -- are located in the Midwest.
In the previous campaign in 2016, Trump won the race by collecting votes from steel and auto industry workers in the Midwest's so-called Rust Belt -- by arguing that American jobs are being lost to trade. Victories in the Midwest states are indispensable for his re-election. And the Midwest is also an agricultural region known as the Corn Belt. Unlike the steel and auto workers, U.S. farmers have traditionally supported the Republicans. But farmers are going bankrupt in greater numbers due to the impact of the U.S.-China trade war.
The main crops in the Corn Belt are soybeans and corns -- both primarily used for livestock feed. But since the trade war started in mid-2018, China -- the world's largest importer of soybeans -- hiked its tariffs on U.S.-made soybeans, causing soybean prices into a nose-dive from which the market has yet to recover. Corn prices have also declined due to the introduction of new regulations by the Environment Protection Agency that reduced demand for ethanol, which uses corn as a key ingredient. That has also contributed to the increasing bankruptcies among farmers.
Trump pushed for bilateral trade negotiations with Japan to win votes from farmers in the Midwest. Right after his inauguration Trump pulled the U.S. out of the Trans-Pacific Partnership and demanded that Tokyo hold bilateral talks with Washington -- which it can control with its power over Japan.
For its part, Japan feared that the U.S. would call for steeper cuts to or elimination of agricultural tariffs than were agreed on under the TPP pact. Therefore, Japan moved to create a TPP without the U.S., hoping to keep the U.S. in check by lowering the agricultural tariffs on participants in the TPP-11 such as Australia than on U.S. farm exports, thus putting American products at a disadvantage in the Japanese market.
The TPP-11 and the free trade pact between Japan and the European Union pushed Japanese tariffs on beef and pork imports from Australia, Canada or Denmark lower than they are on imports from the U.S. If the American beef and pork industries are hurt, U.S. farmers in the Midwest that supply soybeans and corns as feed for the livestock will sustain further damage. Since victories in Midwest states are crucial for Trump's re-election, a trade agreement with Japan that corrects the U.S. disadvantage against other major agricultural exporters like Australia was a must.
Here again, Trump limited the accord with Japan to goods so that it wouldn't require congressional approval after the agreement was reached in September and could take effect in time for the 2020 campaign. In Japan, the deal has been endorsed by the Diet and is set to take effect this month.
Agriculture is a weak spot for Trump. Since other countries in trade talks with the U.S. know that, China imposed retaliatory tariffs on American soybeans, Mexico on dairy products and the EU on bourbon.
What, then, does withholding punitive tariffs on smartphones from China have to do with the U.S. presidential race? On the surface, the decision is a reward for China's trade concessions. But at the same time, it was a measure that the Trump administration wanted to avoid as much as possible. The administration put the measure on the agenda as a tool to threaten China, but in reality it was a paper tiger.
The Trump administration imposed 25 percent punitive tariffs on $34 billion worth of Chinese imports in the first round, $16 billion in the second and $200 billion in the third. Of the fourth-round measure on $280 billion worth of imports, 15 percent tariffs were imposed on $120 billion in September, while the administration said the punitive tariffs would be levied on the remaining $160 billion in December.
The items targeted in the first to the fourth rounds of tariffs were not randomly chosen. Because the U.S. relies heavily on China for consumer goods, that category was left to later rounds as much as possible. That's why 15 percent tariffs were imposed in September instead of 25 percent. In other words, the administration imposed punitive tariffs on China starting with goods that will have smaller impact on American consumers or those that can be sourced from other countries.
Under the latest agreement, the 25 percent tariffs were maintained on items targeted in the first three rounds, but the 15 percent additional tariffs imposed in September were halved to 7.5 percent. Many of the items targeted in the December tariffs whose imposition has been canceled, were consumer goods like laptop personal computers and smartphones, which mostly come from China.
What all this means is that Trump feared alienating U.S. consumers ahead of the presidential race. And when we look back on the Japan-U.S. trade negotiations from this perspective, it becomes clear that the Japanese government was far too frightened by the paper tiger brandished by the Trump administration -- that is, its threat of hikes in automobile tariffs on "national security" grounds.
The U.S. did raise its tariffs on steel and aluminum imports for the same national security grounds. But steel used as raw materials and automobiles as final goods bought by U.S. consumers are different. Last May, Trump postponed the decision on whether to impose the additional tariffs on auto imports for 180 days -- and has left the matter vague even after the new Nov. 14 deadline for a decision passed without any action.
Apparently aware of the hesitancy on the part of the Trump administration, the European Union has not yet started the trade talks with the U.S. that it agreed to launch to avert the new tariffs on its auto exports. Just as in the fourth round of punitive tariffs on China, Trump is unable to raise the tariffs on cars as consumer goods. That is the weakness and the limitations of the self-proclaimed "tariff man."
Backed by the seemingly solid support from Republicans, Trump does not appear to be agitated even by the impeachment proceedings in Congress. However, an influential Christian magazine published by evangelicals recently criticize him as a "grossly immoral character" unfit to serve as president. If such moves shake the Republicans' support of Trump, he might become even more proactive on trade talks to secure his re-election. On the other hand, the negotiating partners of the U.S. have also learned the president's weaknesses.
Many of the issues that remain unresolved between the U.S. and China concern the very economic or political regime of China, such as its subsidies to state-owned enterprises. On the part of the U.S., people who are most interested in these issues are the anti-China hardliners among both Republicans and Democrats in Congress, rather than Trump. The U.S. is retaining the 25 percent tariffs on $250 billion worth of Chinese imports so that it can use them as leverage to resolve those issues. It's not easy to settle the U.S.-China trade war because it is linked to their hegemonic rivalry.
Businesses that anticipate the U.S.-China talks to end the trade war will become protracted as they address more difficult issues will likely try to shift their manufacturing operations from either the U.S. or China to countries like Vietnam. We will need to brace for major changes in global supply chains.