Can the US-China trade truce progress beyond phase one?

Last week was a massive one for the US on the trade front! Trade negotiators, after being stuck in so many traffic jams, finally made what appears to be monumental progress – first reaching agreement on the USMCA (the agreement replacing NAFTA – the North American Free Trade Agreement), and then later in the week coming up with a tentative truce with China on the trade wars with an interim deal that appears to halt the further escalation of tariff imposition. Hallelujah! Perhaps?

Of course, all this is very timely for Washington – bringing in both some Christmas joy for many US importing companies, farmers (bitter-sweet) and of course the US consumers who have had to bear the brunt of these protracted disputes with other countries through mass inconvenience and increased costs. But it is something that the US administration can shout about at the same time as great successes as Trump gears up for the presidential elections in November 2020. And, it is also something that he can shout about while all the impeachment proceedings further take place with the trial in the Senate, following the House’s decision to impeach. Strange world indeed!

For the trade negotiators all these processes and countless meetings have eaten up hours, days, months of time – and just in the case of the US-China trade wars it has been 18 months of almost continual discussion. Longer of course for the USMCA. Although trade negotiators are obviously salaried folk, they won’t get overtime pay, but they may expect a decent bonus – even if only for perseverance! But in the case of US-China what have these talks been about, what do we know so far, and what can we expect going forward?

With what the US has been going through, one hates to think what the UK trade negotiators will be facing as they try re-inventing the wheel with a potential Brexit and all the trade negotiations that that nonsense will lead to. Departing from 40 years of sound trade relations with the EU is not something that is going to be resolved overnight and the UK negotiators look set for years and years of trade negotiations to even get back to the starting line. But I digress, and probably best that I do not go there for now!

I will here just concentrate on the US-China trade war, the reasons behind it and what this most recent so-called phase one ‘deal’ means. It would though be better to call it a phase one trade truce as details so far are very sketchy indeed with few specifics coming from the Chinese side in particular. This phase one is supposed to be formally signed in January. It has also been said that while phase one will focus mainly on tariffs and China’s increased purchases from the US, this will be followed by a phase two which will take in the more thornier issues of structural changes which the US has been pushing for in China’s state-led economic model. 

While some may consider that President Trump intended to try and reduce the trade imbalance with China, it was obviously a very broad strategy from the beginning and that was something which played to his voters with his America First policy. But of course the whole issue is part of a much bigger picture about global economic power and about technology control globally. It is the new game of who will be the next superpower or whether it is possible to have two superpowers. 

Unfortunately, the US-China trade wars dispute has, over the course of the past 18 months or so, overflowed into the mainstream of global trade and investment and landed there contributing to a slowdown in business and investment as companies wade through or try to survive in an increasing age of uncertainty. And we all know business hates uncertainty. 

There is no doubt that global trade has slowed considerably during this period of US-China trade wars – and recent OECD figures show that the EU has suffered the most from the overall global trade slowdown. Certain Chinese manufactures have had a torrid time, although quantifying that is not easy to do with so much news suppressed by Beijing. 

Going forward, China will be exceptionally wary of the US in more areas than before. Many in China have long believed that the US is trying to curb China’s rise as an economic power - but now, for them that is a firm reality. The long-term impact on the US could also be severe too as the country has not felt the full impact yet. And going forward, any country dealing with the US under the Trump administration will most likely be very wary of how they negotiate and what they agree to. Fears of deal snap-backs will be a thing of future negotiations!

Direct winners of the US-China trade wars have been the countries - such as Brazil and Argentina, among others - where China has turned to make purchases of agricultural products, in particular soybeans. And in turn, some commodity traders and producers have been able to capitalise on this trade in various parts of the world. Many agri-product prices have risen through 2019 on the back of the US-China trade wars. In addition, now, many US tech and electronic firms – particularly Apple - will gain from the decision not to put the new tariffs in place as of last Sunday. US clothing retailers – e.g. Columbia Sportswear - will benefit from the reduction in tariffs.

Phase one of the US-China agreement 

So far, details are scant on the phase one agreement which covers only a rather narrow set of issues. But this tentative truce does allow both parties to help restore better economic relations and hopefully take stock. And, as many observers have pointed out the fact that the two countries are still engaging commercially means that there is real hope that both the US and China are committed.

US trade representative Robert Lighthizer said last Sunday the phase one deal reached on Friday is "totally done", and it will nearly double US exports to China over the next two years. 

As the deal was announced, on the Chinese side, Liao Min, a vice-finance minister and an aide to Vice-Premier Liu He said: “Whether the deal is good should be judged by businesses and the market … the positive reactions to the deal in domestic and overseas capital markets have already given a clear answer. This positive effect will show up in areas of the economy, trade and finance, and that’s why we agreed to the deal.”

As part of this first phase, the US cancelled a new round of tariffs on $156 billion of Chinese goods which was set to come into force last Sunday. This would have mainly covered products such as mobile phones, laptops, speakers and other such electronic items – providing US consumers with a real break at this time of year. The US also reduced tariffs to 7.5% from 15% on $120 million of Chinese products, which had been imposed in September 2019. There remains in place tariffs of 25% on a further $250 billion of Chinese goods, pending talks on the second phase. 

According to the US, the Chinese side have apparently agreed to make more purchases (agri, energy, and manufactured goods) of US products - up to $200 billion more over the next two years, in moves to help reduce the US trade deficit. No specific figures have been quoted yet by China – which is a disturbing sign. There has been talk of increased agricultural purchases of up to between $40 billion to $50 billion over the two years. But such volumes would be more than before the trade war began, so how realistic can this be? 

There is naturally some scepticism about the value figures being quoted and China’s ability to massively increase the volume of purchases. Last Friday, Trump told reporters: “I think in agriculture they will hit $50 billion.” This was not qualified with a time period. Products expected to be on the agri shopping list in big quantities are soybeans, wheat and corn (maize), rice, nuts and livestock/meat – hogs, beef and chicken.

US arable farmers have been really battered by the drop off in trade with China because of the tariffs through 2018 and 2019 – and China now has standing commitments to buy products, particularly soy, from Brazil (which has a record harvest and is now the world’s largest producer of soy) and Argentina, which it turned to when the US started the trade wars. While the phase one agreement could be good news for farmers, the US agri-sector is unsure just how strong China’s buying capability will be in the short term because of purchase commitments elsewhere. There are a lot of dynamics to play out.

Interestingly, China can certainly be expected to be making more meat purchases from the US – as the Chinese pig herd, of around 450 million, has been more than halved recently because of the outbreak of African swine fever (ASF). It will decline further in early 2020.

China is the world’s largest meat consumer, accounting for almost a third of global demand. By all accounts it has imported more than 50% more pork and chicken this year so far. The US Department of Agriculture forecasts that China’s imports of US pork will increase almost 67% this year to 2.6 million tonnes compared to 2018.

China’s vice minister of agriculture and rural affairs Qu Dongyu who is also the new head of the UN Food and Agriculture Organisation (FAO), speaking to the BBC last weekend said: “Reaching the phase one trade deal and its later implementation will solve some outstanding problems in the trade of agricultural products and food between the two countries, eliminate many differences and lay a good foundation for solving relevant long-term concerns of the two countries.”

The US trade representative office also said that Beijing had committed to: “structural reforms and other changes to China’s economic and trade regime in the areas of intellectual property (IP), technology transfer, agriculture, financial services, currency and foreign exchange”. But on the issue of protection of IP, there are reports that China has already made some progress to protect foreign IP in China and has put in place several special IP courts. Western firms pressing cases are believed to have already seen a number of rulings in their favour. 

In relation to the whole agreement – which in its draft form is said to be an 86-page document, US trade representative Robert Lighthizer, has stated: “But ultimately, whether this whole agreement works is going to be determined by who’s making the decisions in China, not in the United States. If the hardliners are making the decisions, we’re going to get one outcome. If the reformers are making the decisions, which is what we hope, then we’re going to get another outcome.” 

While the US-China trade deal and the new USMCA get hyped up by some to being a big boost for the US economy, the reality is that these deals should do more for an overall improvement in business and the investment climate both in the US and globally rather than sticking percentage points on GDP. 

However, while so few details have been released on the US-China agreement there will remain an immense amount of scepticism over this so-called phase one ‘deal’. And beyond that one has to ask, in the case of China, is a long term intensely damaging trade war of increased tariffs with a major trading partner the way to go about resolving the US trade imbalance and other issues?

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