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US-China phase-one trade deal gets a reality check after nearly two years

22/11/2021    63

As the two-year deadline for the phase-one trade deal between the world’s two largest economies is approaching, all eyes are on the next step.

Signed in January 2020, the deal was considered a ceasefire agreement between China and the United States following a two-year trade war that originated from a Section 301 investigation by the US in 2018, when Washington said Beijing had engaged in unfair trade practices such as intellectual property (IP) theft and granted excessive government subsidies to a wide range of domestic industries.

The Trump administration first imposed a 25 per cent tariff on US$50 billion worth of Chinese products, then extended the range to US$200 billion. In retaliation, China imposed tariffs ranging from 5 to 25 per cent on various US goods, including agricultural products and vehicles.

A direct result of the phase-one trade deal has been the suspension of more tariffs on both sides. The US suspended a planned increase in tariffs on about US$162 billion on Chinese goods and lowered an existing duty on imports worth US$110 billion. China has also announced rounds of tariff exclusions that exempt American products such as pork, soybeans, liquefied natural gas and medical disinfectants.

But not long after the agreement was signed, the Covid-19 pandemic hit and reshaped the momentum of the global economy. China has fallen behind in some of the commitments it made in the agreement, sparking speculation on fresh trade tensions between the world’s largest two economies.

US Trade Representative Katherine Tai told reporters earlier this month that the Biden administration is “getting traction” with China and intends to hold China accountable to the two-year phase-one trade deal while exploring all weaknesses in China’s performance, according to Reuters.

An additional US$200 billion purchase

Included in the deal is a commitment from Beijing to buy, over two years, at least US$200 billion of American goods and services more than it did in 2017. Those additional purchases will comprise about US$77 billion in manufacturing, US$52 billion in energy, US$32 billion in agricultural goods and US$38 billion in services such as tourism, financial services and cloud services.

According to an October report by the Peterson Institute for International Economics (PIIE), China’s total purchases of US goods from January 2020 to September 2021 reached only 62 per cent of the pledged total, according to Chinese import data, or 60 per cent based on US export data.

The pandemic has long ruled out the possibility of China meeting the purchasing target within the two-year period, said Lu Xiang, a US-China scholar at the Chinese Academy of Social Sciences (CASS).

“The pandemic has caused turbulence on both the supply and demand sides; the purchase part in the deal has become meaningless since last year,” Lu said.

So far, China is closest to the two-year target in purchasing agricultural products. As of September 2021, total purchases of agricultural products reached US$50.3 billion, or 76 per cent of the target based on Chinese import data, while US export data put the figure at 82 per cent, according to the PIIE.

The record volumes of crop and meat shipments across the Pacific have pleased US farmers, created profits for agribusinesses and lifted commodity prices. US Agriculture Secretary Tom Vilsack said in February that he believed China was “living up to its responsibilities” in buying agricultural products, while taking the pandemic into consideration.

But in October, Vilsack took a harder line, pointing out that China was still about US$5 billion short of the purchasing total agreed upon in the deal.

“It is important that we again continue to press the Chinese for compliance with phase one. If you reach an agreement, we want to make sure that there’s performance behind that agreement,” he said.

The pandemic and an excessive supply of pork and increased grain output in China this year have also suppressed Chinese demand for imported agricultural products, said Pan Chenjun, an analyst with Rabobank.

“I think it would be very hard for China to achieve the phase-one target [for agricultural products] in the remaining time,” Pan said.

The pandemic has also slashed China’s demand for items such as Boeing planes – big-ticket orders that could have edged China closer to its goal. As it was, purchases of manufactured products reached 61 per cent of the two-year target as of September, according to Chinese import data, or 59 per cent based on US export figures.

Boeing’s biggest offering to China, the 737 MAX, has been grounded since 2019 following two fatal crashes, and its business has also been caught up in the trade war between the United States and China that started the previous year.
For energy products, China’s purchases reached only 49 per cent of the phase-one target as of September, based on Chinese imports, or 38 per cent based on US exports.

“The problem cannot be solved solely from the China side,” Lu from the CASS said. “The two sides should have had frequent communications in the past few months on the subject matter – how to eventually achieve the US$200 billion target. I think from the China side it is still achievable – if it cannot be done this year maybe next year, and the year after China can make some compensatory trade.”

As the pandemic has reshaped the global supply chain, balancing trade with China should no longer be a priority for the US, said Wang Huiyao, president of the Beijing-based Centre for China and Globalisation.

“The shelves in supermarkets would all be empty in the US if they stick to balancing trade,” Wang said. “The US actually needs to buy more Chinese products to solve its supply-chain crisis.”

Source: SCMP