This is disappointing.
We’ve been closely monitoring trade talks between the United States and China, and we’ve gone on record to note that there are a couple of ways things could go. The two countries will either reach a historic deal that requires China to play by the rules of global competition — or the agreement will be a dud, making a few superficial changes but mostly maintaining the status quo.
Well, score one for the status quo.
Reuters reports that “U.S. negotiators have tempered demands that China curb industrial subsidies as a condition for a trade deal after strong resistance from Beijing.”
Instead, negotiators are focusing on issues they see as more achievable, including ending forced technology transfers, strengthening protection of intellectual property and opening up China’s markets.
Look, addressing technology transfers and intellectual property is vital, and U.S. negotiators are right to focus on them. Ditto for further opening up China’s market.
But by abandoning the issue of industrial subsidies in these talks, the United States is giving a green light to China to continue to cheat the global trading system and put countries and companies that play by the rules at a disadvantage.
Case in point: Steel.
President Trump put a 25% tariff on steel imports in April 2018 in response to surging foreign imports. Now, you’ve probably heard about those "Section 232" tariffs — they’ve garnered a lot of criticism from the Acela Corridor set — but what is often missing from the conversation is that despite Trump’s bluster, there was a very legitimate reason why he issued those tariffs.
China’s government heavily subsidizes its steel industry, and China makes far more steel than it can use for its own purposes. But Chinese companies need to do something with all that extra steel, and so they dump it onto the global marketplace at rock-bottom prices, far below what companies operating in a free market can afford.
This gives China a huge advantage — its heavily subsidized companies don’t have to worry about making money, because their operations are subsidized by the government. As a result, Chinese steel flooded the global market, and a whole lot of that subsidized steel made its way to U.S. shores.
At one point, the flood of cheap Chinese steel imports exceeded the amount U.S. factories produced in an entire year. Tens of thousands of U.S. workers were laid off, and dozens of U.S. steel facilities shut down.
The Obama administration recognized this problem and issued tariffs on specific steel products while also urging China to stop subsidizing its industry. China even pledged to cut its steel production! (Spoiler: China did not.)
Enter Trump, who decided to send a message by issuing the 25% tariff. Since then, things have stabilized for the American steel industry, leading to an uptick in domestic production, 12,000 new jobs, and $18.2 billion in announced investments.
But the underlying problem remains: China is still subsidizing its steel and other key industries.
The tariffs might have stopped the flood of steel imports, but it is only a temporary fix, something United Steelworkers President Leo Gerard pointed out in March during the annual Congressional Steel Caucus hearing:
“The underlying problem of Chinese overcapacity continues to plague world markets and is a sword of Democles hanging over the future of our industry and those in other market economies. The 232 tariffs must not be discontinued, and they should be coupled with renewed efforts to reach multilateral disciplines on overcapacity, largely fueled by China which, in October, had the highest production levels on record.”
Which brings us back to the U.S.-China trade talks.
As AAM’s own Scott Paul recently wrote, Trump is facing a brief window in history when he has an opportunity to do something really big. The domestic economy is doing well, and the bumps caused by his trade fight with China — which not only include action on steel but also $250 billion worth of imports of Chinese goods — have been relatively minor, all things considered.
Trump fancies himself as the greatest dealmaker in the world, and his willingness to play hardball brought China to the table. Now he needs to follow through.
There’s a lot at stake in this deal, and Team Trump is right to demand more market access and enforced intellectual property rights, along with things like stronger labor standards for Chinese workers and stricter environmental controls.
But the deal will be incomplete if China is allowed to continue to subsidize its key industries, as now appears to be the case. If this is how we end up, it will turn out that Trump isn't much of a dealmaker after all.