Good Riddance to a "Nothing-Burger" Trade Deal

China has expanded its domestic debt to fund its growth, much of which qualifies as malinvestment, creating financial vulnerabilities its government is anxious to mask.

As I noted in Trade Deal Follies: The U.S. Has Embraced the World’s Worst Negotiating Tactics (April 8, 2019), the trade deal was a Nothing-Burger for the U.S. Without any consequences for violating trade deals, China violates all trade deals, starting with the WTO. (As an example, China has never reported its state subsidies to Huawei to the WTO as required by that treaty.)

The only trade deal that wouldn’t be a Nothing-Burger for the U.S. is one that explicitly gives the U.S. the sole power to decide if the deal has been violated and impose the consequences. Agreements without monitoring, enforcement and severe consequences are meaningless.

Developing nations are prone to cheating on trade agreements, and developed nations are prone to letting them cheat. It’s a simple matter of incentives and self-interest. Developing nations do not have the resources to develop technologies from scratch, so they steal it by reverse engineering, theft of intellectual property (IP) and industrial espionage. Pathfinding our Destin... Smith, Charles Hugh Best Price: null Buy New $6.95 (as of 11:36 EST - Details)

Developed nations are desperate for the new markets, cheap labor and resources of developing nations, so they overlook technology and IP theft as the “cost” of accessing the benefits of new markets, cheap labor and resources.

As a general rule, developing nations want capital to build out industry and markets for their goods (manufacturing) and commodities. Developed worlds are typically post-industrial for a variety of reasons, and what they want is open markets for their services (finance, insurance, entertainment, etc.).

Developing nations have tremendous incentives to limit the goods and services from developed nations, as these would provide too much competition for the domestic sectors they need to build for their export model of development and for domestic employment.

These tensions build as developing nations become wealthier and the inequalities of the trade and capital flows widen. When the developing nations reaches the point of competing in the global market with the developed nations, then the developed nations naturally demand that the playing field become level.

China is two economies: one developed and wealthy along the coast, the other rural and impoverished. China’s domestic strategy is to shift capital from the coast to the impoverished interior to raise the standard of living of its 600 million rural residents.

By any historical measure, the wealthy coast is a developed nation, and so naturally the developed nations want to level the playing field: they want China to open its domestic markets to foreign capital without demanding technology transfers, open domestic markets to foreign services and stop China’s officially sanctioned wholesale industrial espionage and theft of IP.

But the western interior of China is still a developing nation, and so by averaging the per capita GDP and income of its two halves, China can claim to be a developing world in terms of trade deal breaks while claiming superpower status for its developed half.

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