Interview with Magued Eldaief, CEO of Prescient
Prescient has built itself on leveraging digitisation to bring order to the traditionally somewhat chaotic process of putting up buildings. A winning combination that includes lightweight construction materials and an innovative digital design-build system yields dramatic savings in time and materials. We met Prescient CEO Magued Eldaief, who explained how it’s all done.
Good day, Mr Eldaief! Thank you for taking the time to speak with us today. I understand you have been in various leadership positions since 2001. Being in high-profile posts must induce some stressful moments. Would you mind telling us how you start your day in preparation?
Good health is key to dealing with both the physical and mental demands that any leadership role entails. Gruelling travel schedules and long days can take a toll on the body and ultimately impacts one’s ability to deal with all the stress that is part and parcel of the role. To that point I like to start my day exercising early morning before getting to work, after a good night’s sleep. While exercising, I also like to catch up on what is going on in the world.
Having worked at GE for almost three decades, leading significant functions across various divisions, you then became the CEO of Prescient in June 2017. How was the transition into your current position? What has been your proudest moment as the chief executive officer of Prescient so far?
Transitioning from a large corporation to a young company that is growing rapidly is quite challenging in many ways, as you need to ensure you are wearing multiple hats on a daily basis and driving a number of fundamental areas at an accelerated pace. It starts with having a great team with all the necessary skill sets that are required to build a driven organisation, one that is adopting a repeatable and consistent process to execute for an expanding customer base, all while continuously driving innovation that differentiates and builds a technology moat.
Our adoption journey in an industry reluctant to change has been a difficult one, so I felt extremely proud the first time a customer publicly highlighted the positive impact our technology delivered for their project, without any prompting from us. This was a genuine validation of our belief in our technology, as well as the tremendous amount of effort that our teams put in to get to this point.
Prescient started out in a humble production site of an old 5,000-square-foot aircraft hangar in 2012. To date, it has completed over 42 buildings totalling 6.9 million square feet. What do you think are the key factors that led to Prescient’s impressive success today?
It’s been quite a journey for this company, for sure. I’d say our success has been driven by a desperate need that’s been addressed with brilliant technology, the determination and ingenuity of our people, and an inspiring vision that resonates with so many people around the world today.
The housing shortage that’s reported daily by the media is a significant challenge around the world. That shortage is driven by a number of factors, but the lack of innovation and the structure of the housing construction industry are two of the key contributors. Our founders understood this and leveraged their experience, ingenuity, and the latest software and hardware technology to develop an integrated system that simply enables multi-unit residential projects to be built more efficiently. That software and hardware system, which we call our “digital thread” and Unified Truss Configuration System (UTCS for short), are the foundation for this company and our success.
Next, I have to give huge credit to our team, many of whom have been with us since day one. They’ve faced and overcome an incredible number of challenges, from customer resistance and scepticism, to regulatory hurdles, to never-ending resource constraints, to challenging technical issues, which all had to be solved in order to move forward. They just get it done. They’re pragmatic problem solvers who are inspired by our vision of “Attainable housing for all”. Our people are arguably the biggest factor that has led to our success.
Prescient is at the forefront of digital innovation, with the company embracing technology-driven methodologies to construction, aiming to “revolutionise the building environment”. Can you tell us about the story behind the pioneering concepts of Prescient’s digital design-build system?
Our two inventing founders are John Vanker, an experienced real estate executive, and Michael Lastowski, a structural engineer and architect. Like so many people in our industry, they understand the many inefficiencies plaguing the construction industry business model, such as a very low level of digitisation, the fact that 40% of project costs are wasted, a remarkable lack of standardisation, high fragmentation, the misaligned interest of project stakeholders, and very little investment in R&D or innovation. John and Michael worked together to design and patent a unique structural system and supporting design software that leverages the light weight, strength and precision of steel, to develop and build multi-unit residences and hotels better than ever before.
Their ambition to “build better” started to become a reality when they met our third founder, Satyen Patel. Satyen is an accomplished global executive and software entrepreneur who had just personally experienced the inefficiencies of design and construction while building his family’s dream vacation home. Satyen met John Vanker on a lake in northern Wisconsin where they both have vacation homes. John explained that the construction inefficiencies that Satyen encountered weren’t unique to his single-family home; they were very similar, in fact, to large, multi-family apartment buildings, student dorms, etc. John then shared his and Michael’s technology and their vision of reshaping the multi-unit residential construction industry. That is how the three founders came together and created Prescient in September 2012.
Further to the previous questions, what are the unique advantages and features of using Prescient’s building platform, compared to the traditional construction process?
What makes Prescient unique is the combination of its digital thread software and Unified Truss Configuration System hardware. Think of an erector set with a standard kit of parts made out of steel, with a software app that allows you to design any bespoke multi-family building. That same app allows you to engineer, manufacture and figure out the optimum way to assemble the chosen design, solving for constructability, cost and schedule in a fraction of the time it takes the industry today to do it.
Our proprietary software system interconnects a project’s components and processes, and enables all stakeholders to have timely information to drive faster and cheaper project execution. Prescient projects begin with very accurate and detailed 3D building information modelling (BIM) drawings. This requires more decisions to be made upfront, but results in far fewer surprises and associated greater costs that typically show up later in a project. Our digital thread also provides a transparent view of a project’s schedule and progress for all project team members. That’s referred to as 4D BIM, with time being the fourth dimension. This supports communication, optimises the schedule and provides alerts about potential risks. Finally, the digital thread delivers 5D BIM, with the fifth dimension being cost, by providing project costs and changes to those costs, as project requirements or decisions change. So, having 3D drawings, plus clear and communicated schedules, together with costs, early in a project is truly a major step forward for construction.
One of the main reasons our digital thread is so accurate in its 3D representation (with the drawings matching the physical building), in its schedule, and in its cost estimate is that our UTCS can be manufactured and assembled so precisely. Our manufacturing plants are driven by that same digital thread, and produce building components which are accurate to 1/32nd of an inch. This means that all of the structural components that arrive in the field have been cut precisely, holes are where they’re supposed to be, rough openings are the exact size they were designed to be and, because we use steel, there is no “settling in” period where dimensions shift. Components arrive on-site in a just-in-time fashion to reduce excess inventory on site. Assembly is done at rates in excess of 20,000 square feet per week (and we get faster every year). And the assembly process requires a crew of only 36 installers. This is a huge advantage that the Prescient system delivers within an industry where labour is in such short supply! Finally, given the accuracy of our designs, manufacturing and assembly, Prescient projects have little to no waste. The bottom line is that Prescient reduces costs, time and risk for every project it helps build.
During March of last year, Prescient pulled off a feat no other US construction company had done before and built the largest student housing development at the University of California, Davis. This historic moment is also notable as it was your first project in a seismic zone. Could you tell us more about this exceptional achievement? What were the challenges you faced and how did you overcome them?
Our system was chosen to be used for the 1.3 million-square-foot student housing project at UC, Davis by CBG Building Company. CBG had used us on three previous student housing projects and one very large apartment building. They knew that using Prescient would reduce the number of workers they’d need to use and, more importantly, that the project would be completed on time.
Of course, since this project was in California, our system had to be approved for use in seismic zones. Our light-gauge steel system is naturally ductile, lightweight, and it’s all reinforced, so it performs exceptionally well to the extreme forces experienced in a seismic event. We’ve collected more than 500 million data points and conducted almost 900 tests to validate the ability of our structures to withstand even the most severe earthquakes ever recorded.
The company vision is to have “attainable housing for all”. From your numerous projects, it is safe to say you have rendered good service towards achieving this mission. How does the company’s continuous focus on digital innovation enable such a vision?
Our vision is a huge motivator for the continued development of our platform. I believe we have barely scratched the surface with what we have accomplished. Our digital thread uses artificial intelligence to analyse the immense amount of data we’re collecting on projects to identify future efficiencies. It allows us to pinpoint where the focus needs to be to impact time, cost and risk and we get smarter with every new project we complete.
To fully deliver on the vision, there are other aspects beyond our control (e.g. regulatory challenges, increasing land prices, etc.) that we must absolutely tackle to provide a satisfactory resolution to housing affordability and, there, Prescient is actively participating with various industry associations and councils to tackle this crisis.
One of your projects, the Renaissance Downtown Lofts, has recently been recognised with two major awards, namely: Urban Land Institute’s (ULI) 2019 Global Awards for Excellence and PCBC Gold Nugget 2019 Award of Merit. I understand that this particular multi-unit housing was established for the aid of the Denver homeless population. How important is corporate and social responsibility for Prescient?
As CEO, talking about ‘corporate and social responsibility’ might sound like I’m just checking a box. Though we didn’t pursue the Renaissance Downtown Lofts project as part of a corporate and social responsibility goal, we did it because it sits squarely in the centre of our vision of providing “attainable housing for all”. As I said earlier, we are extremely motivated by this cause and it drives much of what we do. To this end, we have been active with several chapters of Habitat for Humanity and have worked with veterans’ organisations to help provide them with better and more-affordable housing options.
Our system is also very environmentally friendly and we are very proud of that. Our projects have very little waste, and we use highly recycled steel, which is lightweight, so it’s produced using significantly less carbon than other building materials. Plus, all of our components can be used again at the end of a building’s life cycle. These two areas of corporate social responsibility are very important and relevant to our company and our people.
More and more companies are investing in the green economy, as the situation urges. What are the sustainable strategies and practices the company has utilised to cater to this international demand?
As I described earlier, our system offers a greener approach to developing multi-unit residences. Our initial promise for our company was: faster, better, greener and cheaper. So, being environmentally beneficial to the construction process has been a core promise for our company and our system since its beginning. Our buildings typically weigh 50% to 65% less than their concrete equivalents, which means they require significantly less carbon to produce. Our overall approach of digital design and precision manufacturing means our projects experience significantly less waste. A McKinsey study concluded that most construction projects have 40% waste in their raw material usage. Our projects have 1% to 3% material waste, by comparison. Our steel is highly recycled, and 98% of the water used to produce steel can be filtered and reused. While our buildings are designed for a 100+ year life cycle, when they are ultimately torn down, the steel can be recycled and used again. Finally, our steel-framed buildings are energy-efficient throughout their useful lives.
Technology is continuously changing the world and the way business and industries operate. Can you tell us what are the latest technologies or initiatives that you are currently working on to ensure that your projects and solutions remain cutting-edge and of the highest quality?
I would break our technology initiatives into several buckets, the first one around platforms related to different market segments we serve. These include a seismic offering for serving geographies prone to earthquakes, like California, Mexico, large parts of South America and Asia, and a progressive collapse offering that serves the need for military housing. We are also working on a number of digital solutions that are enhancing our end-to-end digital thread for our core platforms, and a market-facing portal that offers all project stakeholders the ability to interact real-time using our detailed BIM models to evaluate, design and execute projects faster and cheaper.
As the CEO of a dynamically developing company, how do you look after the well-being of your employees? How do you encourage a working culture of continuous innovation and learning?
We really have an outstanding and diverse team of professionals. I can’t say enough positive things about them. One of our corporate belief statements is, “Our employees make the impossible a reality.” To enable that belief, employees need to feel that they have the freedom and support to challenge the status quo and push boundaries, or else how do you transform and reshape an industry?
Having an innovative and naturally curious mindset starts at the top of our organisation, with our leadership team. If you look at their backgrounds, you’ll see that fewer than half of them are from construction. They bring a variety of experiences to the table to help us approach challenges differently. The questions they ask of their teams are probably not as linear as those that would be asked by someone who grew up in in this industry. The members of our leadership team are natural change agents who help their teams continuously strive to learn and improve.
With almost 25 years (and counting) of professional experience, what do you think are the most valuable lessons you have learned? What would be your advice to those who want to venture into this industry?
It is all about surrounding yourself with diverse leaders and teams that have the right attitude and a winning mindset. Even with the best-laid-out vision and detailed strategies, there will always be challenges and obstacles to overcome, so it comes down to how you react and deal with what comes your way. It is about persevering and fighting for what you believe in.
For those venturing into construction technology, be prepared to face a lot of detractors who will find all that is wrong with your approach or product. Ultimately, we have found that we need to be engaging with real-estate owners who will value the outcomes we create using our technology platform. In a fragmented industry where interests are not aligned between stakeholders, the primary outcome that matters is the return being delivered to these owners.
Would you mind telling us about Prescient’s future aspirations for 2020? What do you hope to accomplish or improve in the years to come?
There are so many exciting opportunities in front of us. After growing more than 40% this year, we’re on track to grow more than 90% next year, with most of those contracts already in place.
We’re rolling out our seismic platform for buildings up to 180 feet tall, which will be a big game-changer in markets like California, where the costs of traditional building approaches are high.
We’ve recently been approved by the Army Corps of Engineers for our engineered system to be adopted for all military barracks, dorms and hotels on bases around the world, as it meets the government’s exacting technical requirements. We’ll start our first projects next year and expect a significant ramp-up in federal business in the future.
We are also hard at work in getting our platform certified by the EU and seeding the European market with a finished building mock-up showcasing our technology, as we believe that our value proposition is even more powerful outside the US.
To conclude, what does success mean to Magued Eldaief?
Success for me is about building a global technology housing platform that makes a real dent in solving the housing affordability crisis. Just like Henry Ford industrialised car manufacturing with the Model T, I would like to industrialise and standardise multi-family housing, leveraging our technology platform to standardise the process and methodology of developing and building housing to provide an unlimited choice of housing offerings that are cheaper, faster and greener.
Thank you very much Mr Eldaief. It’s a pleasure speaking with you.
Executive Profile
Magued Eldaief joined Prescient as CEO in June 2017. A 27-year GE executive, he most recently led the global commercial operations of the $4B Industrial Solutions business of GE which includes Low Voltage, Medium Voltage, Control & Automation Products & Services. Prior to that role, he was the CEO of GE Industrial Solutions division for the Europe, Middle East & Africa region. A multilingual and multicultural executive with broad experience in the energy industry, Magued held positions of increasing responsibility across five continents in GE’s Power & Energy division. He managed large infrastructure construction projects throughout his tenure at GE and had significant exposure to numerous divisions and functions throughout the organization including: sales and marketing, strategic planning, project structuring, EPC (engineering, procurement, and construction), services, and regional and global business unit leadership. He is an early investor in Prescient and served as a member of Prescient’s advisory board prior to joining as CEO.
Trump’s Feeble Phase 1 China-US Trade Deal
By Dr. Jack Rasmus
With the announcement today, January 16, 2020 of the signing of the US-China Phase 1 ‘mini’ trade deal, and the US Senate’s simultaneous ratification of the USMCA ‘NAFTA 2.0’ trade agreement, Trump’s so-called ‘trade wars’ are at an end. In election year 2020 nothing of additional significance will be achieved by Trump with regard to restructure US and global trade relations. While Trump himself will make further threats and claims, likely aimed at the Europeans, no country will agree to any changes this year when the possibility exists of Trump leaving the presidency next November 2020. To repeat once again, the Trump trade wars are over. As the comedian once said: ‘what you see is what you get, baby’.
And what do we see in the much-hyped and grossly exaggerated Phase 1 US-China trade deal?
China Phase 1 Deal: A Feeble Deal on Trade
Behind the typical Trump bombast, hyperbole, and outright lies, the China Phase 1 deal was perhaps best summed up in the front page of the Wall St. Journal on January 13, 2020, by the Ben Steil, Director for International Economics for the Council on Foreign Relations (i.e. the major think tank for the US capitalist class): “China is set to do little more than restore agriculture purchases and offer some nice words on financial services and intellectual property…Trump could have had that two years ago without the tariff damage”.
What’s really in the Phase 1 deal? What has Trump actually achieved through nearly two years of negotiations, tariffs, and threats and intimidation in the nearly two year long China trade negotiations? And what have been the consequent negative impacts on US households, businesses, farmers, and the US and global economy?
51% Majority Ownership
First, in Phase 1 there’s the claim that US business, especially US bankers, now have more access to China markets. They can have 51% ownership control of their operations in China. Trump claims he achieved that. But it’s just another Trump lie. The fact is China began implementing the 51% financial ownership rule back in 2018. European banks have already set up full ownership operations there. So has Goldman-Sachs, the premier US investment (shadow) bank. Trump didn’t get anything there China already offered and gave to others.
Currency Manipulation
Trump says the deal means China has agreed to no longer ‘manipulate’ its currency. Trump this past week then officially removed the US declaration that China was a currency manipulator. The importance of currency manipulation is that Trump wants to block China’s potential to devalue its currency, the Yuan, which would offset any US tariffs easily. But China has not been a currency manipulator at all. In fact, it has been entering global money markets to buy and sell its currency to ensure that it remains within a stable range of exchange to the US dollar no greater than 7.1 to the $. If anything China has committed significant resources to ensure the Yuan does not devalue. That’s the opposite of a currency manipulation to devalue and offset US tariffs. China could have easily done so throughout the last 22 months of trade negotiations with the US, but it didn’t. The claim of China as currency manipulator has been a lie from the beginning, used by Trump (and others before) to try to label China as the problem with the American media and public. It’s worth noting as well that while China has spent billions to ensure its currency does not devalue or rise, the US dollar has been allowed to rise significantly the past two years. That has caused other global currencies, especially those of emerging market economies like Latin America, to devalue dramatically and plunge those economies into recession. The US has been the great currency manipulator and destabilizer—not China.
IP and Tech Transfer
Trump also claims the China Phase 1 deal means new limits on China forcing technology transfer of US companies doing business in China and on intellectual property. (Protecting intellectual property mostly means for the US that US pharma companies will enjoy better patent protection—i.e. prevent competition).
But whether IP or tech transfer, there have been no details released by the Trump administration as to how this is so. In fact, as if January 15, 2020 the text of the Phase 1 deal is still not available in either English or Chinese, according to the New York Times.
All we’ve got in the Phase 1 deal, according to those who have had access to date, is China’s promise to punish China firms that obtain sensitive tech information via acquisitions; or stop requiring that foreign companies turn over technology to China as a condition of doing business in joint ventures in China.
But certainly in any joint venture tech information can be obtained by means other than formally turning it over to China government officials. And doesn’t a company that acquires another have legal right to all its product information? According to a Derek Scissors of the American Enterprise Institute, in the Phase 1 deal the Chinese “have committed to continue doing the same thing they have always been doing”. What China refused to agree to is to refrain from engaging in cybertheft of companies—since of course the US refused to agree to the same.
So forget about any big breakthrough in the Phase 1 deal associated with IP and/or tech transfer as well.
$100B in US Farm Goods Purchases?
Trump’s big claim about Phase 1 is that China has agreed to buy $200b more in goods over the next two years, $100b a year roughly divided between $50b for farm and $50b nonfarm goods and services. But was this a new gain from negotiations and tariff intimidation? And will it be actually realized over the next two years? And is it really $50b a year more in farm purchases?
First, China had already offered in 2018 to increase its purchases of US goods and services by $1 trillion over the next five years. So it already put that number, $200b a year, on the negotiating table. But that was two years ago.
But most economists today doubt that China will buy anything near $50b a year in additional farm products from the US. According to the January 15, 2020 New York Times, those who have actually seen the agreement indicate China has actually agreed to buy only $16b more a year over two years. The $50b claim by Trump thus quickly lowered to $40B. Furthermore, the $40B was not new additional purchases.
That $40b is comprised of $24B/yr in farm goods bought by China in 2017, plus the $16B more commitment per yr. for 2020 and 2021. Farm purchases fell in 2018 and 2019. So the $32B just mostly makes up for the shortfall the last two years. At one point in spring 2019 China farm purchases were as low as $7B a year.
So the $16B more per yr. represents a restoration of what China was buying in 2017, adjusted to make for the declines while the trade war was underway, and it all expires after just two years. So Trump’s boast of $100B in farm goods reduces to $32B in fact, which mostly makes up for reduced purchases the past two years, and returns to the pre-trade war 2017 level of $24B! Nearly two years of trade war to return to the status quo ante of 2017!
Moreover, trade experts are also saying that even the $16b more in farm good purchases will be difficult to achieve. During the last two years China has diverted its purchases of soybeans and other farm goods to Brazil and other countries. And China has said the Phase 1 will not mean any change in its prior contracts with other countries. It won’t cancel Brazil in order to fulfill US commitments under Phase 1. So where’s the big surge in China purchases of US farm goods? It’s more like a restoration, with no commitment to increase after two years. And it leaves US farmers with a lot of uncertainty as to future sales plus not enough time, and thus greater risk, to invest in expanded production to meet China’s purchases.
Furthermore, China sees even Phase 1 farm purchases as a goal, not a firm absolute commitment. Its chief trade negotiator, Liu He, has been quoted as saying purchases will occur “according to the needs of the (Chinese) consumer and as market conditions determine”. Think of the latter phrase “as market conditions determine” as a code word that means China may purchase more depending on whether Trump reduces US tariffs more in tandem.
Trump $370B Tariffs Remain
Trump has declared he won’t reduce tariffs on China any further. It now stands as 7.5% on $120B and another 25% on $250B. Trump says he needs to retain the tariffs in order to ensure China abides by the other terms of the agreement. But he can’t have his cake and eat it—i.e. China purchases $100B more a year but Trump keeps $370B. China has made it clear, more purchases are linked to lower tariffs.
So long as Trump’s $370B tariffs remain, it will become increasingly clear that China intends to purchase far less than the $100B a year. It just won’t happen regardless what Phase 1 says. Farm purchases in particular won’t come anything near to even the $32B more ($16B/yr), reported January 15 in the New York Times, let alone to Trump’s inflated claim of $40-$50B.
Trump may believe he needs the continued tariffs to enforce the agreement’s terms by China. But China’s quid pro quo enforcement ‘tool’ is to simply slow or delay its official purchases “as consumer demand and market conditions” dictate. Its tariffs vs. not fulfilling purchase commitments due to ‘market conditions’.
Manufacturing & Services
In addition to the $32B more in farm purchases, reportedly Phase 1 calls for another $78B in manufacturing and $38B services purchases over next two years as part of the Phase 1 deal as well. But that too might not be realized. Most of China’s manufacturing purchases is for Boeing planes, now plagued with shipment cancellations worldwide due to the 737max; and the $38B in services purchases involve mostly Chinese purchase of US education services and tourism, both of which are being sharply cut back by Trump as the US policy now is to discourage Chinese students and research academics coming to the US, and as China tourism to the US slows as relations between the two countries continue to deteriorate.
US auto exports to China will not be affected much either. There’s a major slump in China auto sales, China is committed to rapidly building up its own auto industry, and US companies are racing to move production to China anyway, all of which would reduce the need for China to import autos from the US over the next two years.
Finally, there’s the commitment of China to buy $27B a year more in US energy products, oil and natural gas. The US benefits having an outlet for its rising glut of natural gas and oil, which it is betting on exporting in order to keep supply and prices high in the US market. But should a global recession occur in 2020 or after, China ‘market needs’ and demand for US oil and gas will certainly decline and the commitment to buy in this area will likely fall far short of the annual $27B as well.
Nextgen Tech War
Behind the trade was with China has always been the more important tech war between the two countries. The tech war is not be confused with IP or even with tech transfer by US companies in China. It’s much bigger. It’s about next generation technologies like Artificial Intelligence, Cybersecurity, and 5G wireless. These are the technologies of the industries of the next decade. They are also the military technologies of the future. Which country dominates these technologies achieves military hegemony by 2030. Both China and the US know it. And the ‘war’ between them has been occurring behind the cover of tariffs and trade war.
But with the Phase 1 trade deal it is clear that the tech war has been now decoupled from the trade war. It will be (and has continued to be) conducted by other means than tariffs. The US will continue to go after its allies with sanctions should they adopt China tech in these areas. The offensive against the giant China telecom company, Huawei, now the world leader in 5G, is the harbinger of a much greater, wider, and longer conflict between the US and China over nextgen tech.
The China-US tariff/trade war may be over, but the China-US tech war has just begun and will now accelerate.
Trump believes he can engage China over tech in Phase 2 negotiations. But Phase 2 is a fiction. It will not happen. Even if the two countries’ representatives meet it will be a fruitless discussion. Neither will ever come to an agreement. China will never trade next gen technology for tariff reduction. It won’t trade tech for anything the US can offer.
Artificially Intelligence and 5G are key to the development and functioning of next generation hypersonic missiles and hyper-smart torpedoes; for future military drone technology and targeting; and for future battlefield communication and coordination between machine and human. So far the US is ahead in AI but behind in 5G. It has no latter product of its own. Globally, its Huawei and Europe’s Ericsson that are leaders in the product development. The US once premier tech company, AT&T, is now preoccupied with investing in entertainment software and content, driven by its shadow bankers demanding more profits sooner than later. The US is thus forced to try to stop Huawei instead of out-competing it in tech development of 5G.
Subsidizing State Owned Enterprises
Not in the Phase 1 deal is the Trump-US complaint that China continues to subsidize its government owned enterprises by enabling low priced costs and inputs to production paid for by China government. But the US engages in massive subsidization of US companies worldwide as well. It does so by other means. Consider the massive $5.5 trillion tax cut of 2018 for corporations, businesses and investors. The US subsidizes and aids US corporate competitiveness worldwide by tax relief. It also subsidizes the cost of financing exports with the US Export-Import bank. It provides business virtually free R&D from US taxpayer financed technology developed by DARPA, the NSA, National Institutes of Health, and many other means. So it’s really a joke for the US to charge China is engaging in uncompetitive subsidization of its government owned companies.
The Cost of China-US Trade War
Any proper assessment of the Phase 1 deal requires consideration not only of what has been gained (or not gained) but also what has been the cost of the 22 month trade war to the US economy.
Has the trade war actually reduced the US trade deficit—with China and with the rest of the world? Not really.
The deficit in goods with China was just under $350b when Trump assumed office, according to the US Census Bureau. It surged to about $410B by end of 2018. It has since come down to about $350B again. So Trump has merely reduced the trade deficit with China equal to the amount of the deficit increase he oversaw in 2017-18! With the Phase 1 deal the deficit will almost certainly begin to rise once again.
On a global scale, as the deficit with China ballooned and then leveled off at pre-Trump levels, under Trump the US goods trade deficit with the rest of the world continued to accelerate rapidly under Trump and still continues to do so. From roughly $375B when Trump entered office in January 2017, the US deficit has surged beyond $500B by end of 2019. So much for Trump’s trade wars apart from China!
What was the cost of reducing the surge in the China trade deficit he created?
The US National Bureau of Economic Research estimated that Trump’s China tariffs were fully passed on to US companies in all industries except steel, where half were passed on. It cost US businesses $42 billion. And they passed most of it on to consumers and US households.
A study by the Federal Reserve Bank of New York (authors Weinstein and Redding), “found that approximately 100 percent of import taxes fell on American buyers” (New York Times, January 7, 2020, p. B4).
US farmers took a big hit. Trump provided $28B to the farm sector in new subsidies, the cost of which added to the US budget deficit (now more than $1 trillion) and rising national debt (now more than $23 trillion). Most of the subsidy went to large farmers and agribusiness, however. Farm income contracted throughout 2018-19. Farm loan delinquency rates have now risen to a six year high, per the FDIC, and Chapter 12 farm bankruptcy filings are highest since 2012.
The trade war devastated US business confidence with the result that business investment in the US contracted throughout 2019.
US consumer households experienced a reduction of $806 dollars in real income spending due to the tariffs.
And estimates are that Trump’s trade wars have reduced global investment and GDP by as much as $700 billion.
Concluding Remarks
Trump administration spokespersons—Larry Kudlow Trump’s Economic Advisor and Steve Mnuchin, Treasury Secretary—are, per latest report, peddling the prediction that the US economy will grow by up to 0.75% more in GDP terms in 2020 as a result of the Phase 1 China deal. But that is based on the absurd assumption that China will buy $100B-$150B more in US imports in 2020—a misrepresentation which, as was explained above, is as ridiculous as it is false.
No doubt the media will continue to spin the exaggerations, although nearly all economists’ estimates of the Phase 1 deal conclude ‘there’s no there there’, at best.
As minimal are the gains from the Phase 1 agreement with China, Trump’s ‘other’ trade wars and deals, including the also much heralded USMCA (NAFTA 2.0), produce even less in net terms. Whether the US-South Korea free trade agreement, the Trump tariffs on steel and aluminum worldwide, Trump’s recent tariffs on European wine and spirits, or his verbal understandings with Japan on trade—all represent even less achieved than the minimal recent agreement with China.
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