Recent research by the Federal Reserve Board[1] has found a negative influence on the US as well: “U.S. manufacturing industries more exposed to tariff increases experience relative reductions in employment as a positive effect from import protection is offset by larger negative effects from rising input costs and retaliatory tariffs. Higher tariffs are also associated with relative increases in producer prices via rising input costs.”
In the absence of a trade deal, the factors mentioned above would have continued to play a role to the extent that there would have been further tariff escalation and prolonged uncertainty about where the confrontation would lead us. Counterfactual analysis, which compares an outcome with an alternative scenario, tells us that we should rejoice about the agreement. Leave the alternative aside and the conclusion is that there are fewer reasons to be cheerful. The Chinese commitment to purchase more US goods only relates to the next two years and is less clear about what follows. Moreover, the commitment does not seem to be written in stone as the Chinese vice premier reportedly said that these purchases would be based on market demand in China[2]. Third party countries, who are bystanders to this bilateral ‘managed trade’ deal, will be concerned about the consequences in terms of trade diversion. This concern was aired by Phil Hogan, the EU trade commissioner, in a speech in Washington DC, although he also welcomed the provisions on the protection of intellectual property rights[3].
The deal is a phase 1 deal, so inevitably, attention of companies and governments will quickly shift to the next stage of negotiations. President Trump has said he could wait to get a phase 2 deal with China until after 2020 election, thinking it would allow to negotiate a better deal for the US. Considering that negotiations are a game of the carrot and the stick, this could very well mean that after the relief, trade-related uncertainty would increase again.
