What about this Phase 1 Trade Deal with China?

Published on: 09:51AM Jan 27, 2020

On January 15, 2020, President Donald Trump and Chinese Vice Premier Hiu Le signed a so-called “Phase 1” trade deal, not truly ending the 18-month trade war between the world’s two largest economies but effectively establishing a truce.

In the deal, China agrees to buy a total of $200 billion of U.S. goods over the next two years from a list of enumerated product categories, including $80 billion worth of agricultural exports, although the specific commitments within the various agricultural categories were not released to the public.  They also made commitments to enforce U.S. intellectual property rights, although similar commitments have been made previously by the government of China and not fully honored.  The agreement also spells out how China will reform its SPS regulatory system in order to make it easier for the United States to sell them certain types of agricultural goods, such as biotech crops, livestock feed ingredients such as distillers dried grains, dairy and meat products, specific types of fresh fruit, pet food, live cattle, and infant formula.  The deal also makes it easier for U.S. firms to offer financial services in China.

In exchange, the U.S. government withdrew its designation of China as a currency manipulator, and backed off of its latest round of tariff escalation, although U.S. tariffs remain in place on $360 billion worth of Chinese exports to the United States.

The initial phase failed to address many of the issues that President Trump claimed as a rationale for initiating the trade war back in the summer of 2018, such as China’s use of public subsidies to support certain industries and encourage investment in innovations.  It is not clear that either side intends to tackle the remaining, more difficult issues in a ‘phase 2” deal any time soon.

Agriculture Secretary Sonny Perdue, while hailing the new deal, was also quick to assert that USDA still intended to disperse the third tranche of the 2019 Market Facilitation Program (MFP) payments soon, bringing the two-year total to $28 billion.  Some observers have noted that U.S. farmers and agribusinesses will have received a bailout over a two-year period that is roughly twice the size that the U.S. auto industry was given in 2009.

Expert opinion is mixed as to whether the Chinese are likely to be able to meet their U.S. agricultural import commitments of about $36.5 billion in 2020 and $43.5 billion in 2021.  These figures represent 52 and 81 percent increases respectively over the previous record level of U.S. agricultural exports to China of $24 billion in 2017.  It is worthwhile to note that the government of China did not formally commit in the agreement to remove the tariffs it has imposed on its U.S. imports on a range of agricultural goods during the course of the trade war.  It may still do so in the future, although it is likely to do so only on a case-by-case basis.

In comments made after the signing ceremony, the Vice Premier said that “sales would depend on domestic demand and U.S. prices.” On the other hand, U.S. government officials, such as the USDA Chief Economist and the Chief Agricultural Negotiator at the Office of the U.S. Trade Representatives have recently offered public assurances that these levels can and will be met.  At least with respect to agricultural trade, we won't know if the government of China is in compliance until trade data is compiled by early next year.

As a result of the widespread outbreak of African Swine Fever (ASF) over the last year or so, causing the loss of as much as half of the country’s hog herd, Chinese demand for soybeans, corn, and other livestock feed ingredients has declined.  On the other hand, demand for pork has increased. While the coronavirus outbreak this month in Wuhan is likely to disrupt international travel over the next few months, it is not clear what impact it might have on trade flows to and from China.

According to FAO data, China imported about $112 billion worth of agricultural products from all sources on average between 2013 and 2017, so this new commitment would amount to a 36 percent share of that total.  Unless China substantially increases its overall import amounts, increases of this level for U.S. exports will certainly cut into the current market shares of many of our competitors, including the European Union, Canada, Australia, Brazil, and Argentina.

The European Union’s Trade Commissioner, Mr. Phil Hogan, has already indicated publicly earlier this month that his staff will be scrutinizing the details of the Phase 1 trade deal, and may consider filing a WTO trade dispute case if they determine that it is not consistent with WTO rules.  Questions have been raised over whether this deal represents a managed trade arrangement, which could be deemed a violation of the fundamental WTO principle of equal treatment between all WTO member countries.