China's proposed trade agreement is a collaborative work specifically for Trump
O n Friday markets responded in response to news of a potential deal to end the ongoing trade war between the United States and China. Of course, investors are just happy to hear it. But China's proposal to increase imports of US goods and cut US trade deficits with China will not solve some of the core problems that led to the trade war in the first place.
Does China cheat on trade? Definitely – and unfortunately, this proposal will not stop Beijing from doing so. It just howls President Trump's obsession with the trade deficit.
But the trade deficit is not an economic problem. They reflect that US consumers, with more purchasing power than their Chinese counterparts, buy more goods. When Chinese companies benefit from the spending, they look for profitable ways to invest the money. That means they often look to the United States with its strong economy and currency, investing in companies, real estate and industry. That investment is a good thing for the economy.
But that does not mean that there are no real problems with Chinese trade.
As Trump has pointed out, Chinese companies have repeatedly engaged in forced technology transfer, the practice of compelling US companies to transfer intellectual property to Chinese counterparts in exchange for market access. Chinese companies have also flattened out stolen technology for US and other foreign companies. In addition, China gives unfair legal benefits to its own state-owned companies. They exclude foreign competitors almost entirely from specific markets, such as the Internet, and they fail to maintain the protection of intellectual property rights.
Perhaps most worryingly, China has also used interaction with foreign companies for military and state security gains. Companies that acquire foreign technology have been involved in sharing that technology with the Chinese military. Other Chinese companies, mainly Huawei, have recently been accused of violating international sanctions and supporting rogue states such as Iran, as well as acting as a state-sponsored espionage threat, as it collaborates with countries to roll out 5G networks.
They are very real and serious concerns, and none of them are addressed in the current proposal.
However, investors think it is a chance to end the trade war that costs the economy at least $ 1[ads1].4 billion each month. But this deal, far from being an economic cure, can actually aggravate some of the real issues. The US has actually already moved to limit the types of goods that can be exported to China for fear of their use in military operations.
Although the United States goes for the current deal and ends tariffs, Washington will eventually deal with real trade problems presented by China. With this proposed deal, China plays Trump at its own game: speaks out its misunderstood understanding of trade deficits while adding a "fix" that does not solve any of the real trade problems.