U.S. October export data were released earlier this month. While there are some improvements in some categories of merchandise exports in October (particularly in agricultural categories), China remains far behind its overall commitments in the U.S.-China Phase I Trade Agreement for first year purchases of U.S. goods. As reported in prior posts, both China and the U.S. have taken steps to implement parts of the Phase 1 Agreement that took effect on February 14, 2020, although recent comments from the Trump Administration indicate there are challenges in confirming changes in Chinese policy have been implemented in fact.
Besides questions on whether changes announced by China have actually been implemented, China is far behind in its year one purchase commitments from the Untied States. Prior posts on the U.S.-China Phase 1 Agreement can be found here: November 13, 2020, U.S.-China Phase 1 trade agreement – Data through September 2020; USDA and USTR report on agriculture portion, https://currentthoughtsontrade.com/2020/11/13/u-s-china-phase-1-trade-agreement-data-through-september-2020-usda-and-ustr-report-on-agriculture-portion/; October 10, 2020, U.S.-China Phase I Trade Agreement – first six months data on U.S. exports (March-August 2020) covered by the purchase commitments show China needing to triple purchases in next five months to meet first year commitments, https://currentthoughtsontrade.com/2020/10/10/u-s-china-phase-1-trade-agreement-first-six-months-data-on-u-s-exports-march-august-2020-covered-by-the-purchase-commitments-show-china-needing-to-triple-purchases-in-next-six-months-to-meet-fi/; September 12, 2020, U.S.-China Phase I Trade Agreement – How is China Doing to Meet Purchase Commitments for the First Year; a Review of U.S. Domestic Exports through July 2020, https://currentthoughtsontrade.com/2020/09/12/u-s-china-phase-1-trade-agreement-how-is-china-doing-to-meet-purchase-commitments-for-the-first-year-a-review-of-u-s-domestic-exports-through-july-2020/; August 8, 2020, U.S.-China Phase 1 trade agreement – review of U.S. domestic exports through June 2020, https://currentthoughtsontrade.com/2020/08/08/u-s-china-phase-1-trade-agreement-review-of-u-s-domestic-exports-through-june-2020/; July 10, 2020, U.S.-China Phase 1 Trade Agreement – limited progress on increased U.S. exports to China (through May), https://currentthoughtsontrade.com/2020/07/10/u-s-china-phase-1-trade-agreement-limited-progress-on-increased-u-s-exports-to-china-through-may/; June 5, 2020, U.S.-China Phase I Deal is Failing Expanded U.S. Exports Even Before Recent Efforts by China to Limit Certain U.S. Agriculture Exports as Retaliation for U.S. Position on Hong Kong, https://currentthoughtsontrade.com/2020/06/05/u-s-china-phase-i-deal-is-failing-expanded-u-s-exports-even-before-recent-efforts-by-china-to-limit-certain-u-s-agriculture-exports-as-retaliation-for-u-s-position-on-hong-kong/; May 12, 2020, U.S.-China Phase I Agreement – some progress on structural changes; far behind on trade in goods and services, https://currentthoughtsontrade.com/2020/05/12/u-s-china-phase-i-agreement-some-progress-on-structural-changes-far-behind-on-trade-in-goods-and-services/; January 19, 2020, U.S.-China Phase 1 Agreement – Details on the Expanding Trade Chapter, https://currentthoughtsontrade.com/2020/01/19/u-s-china-phase-1-agreement-details-on-the-expanding-trade-chapter/; January 15, 2020, U.S.-China Phase 1 Trade Agreement Signed on January 15 – An Impressive Agreement if Enforced, https://currentthoughtsontrade.com/2020/01/15/u-s-china-phase-1-trade-agreement-signed-on-january-15-an-impressive-agreement-if-enforced/.
As is known, an unusual aspect of the Phase 1 Agreement is agreement by China to increase imports from the United States of various categories of goods and services during the first two years of the Agreement with 18 categories of goods grouped in three broad categories (manufactured goods, agriculture and energy) and five services categories. Chinese imports of goods and services from the United States under the Agreement are supposed to increase by $76.7 billion in the first year over levels achieved in 2017 and in the second year by $123.3 billion over 2017 levels. The categories and tariff items included in the goods categories are reviewed in Annex 6.1 of the Agreement and the attachment to Annex 6.1. In the confidential version of the agreement, growth levels are provided for each of the 23 categories of goods and services.
While the COVID-19 pandemic has affected trade flows for most countries including both China and the United States and while bilateral relations between the U.S. and China have deteriorated since the signing of the Phase 1 Agreement, China continues to indicate its intention to honor the Phase I Agreement. Article 6.2 of the Agreement defines the time period for the purchase commitments as being January 1, 2020 through December 31, 2021. So the first year by agreement is calendar year 2020.
However, since the Agreement took effect in mid-February, my analysis has focused on the period since the agreement went into effect (for statistics, from March 1, 2020). This is consistent with the position that USTR and USDA took in an interim report released on October 23 looking at China’s compliance with its purchase commitments in agriculture. “It is worth noting that the Phase One Agreement did not go into effect until February 14, 2020, and March is the first full month of its effect. That means that we have seen seven months of agreement sales.” U.S. Trade Representative’s Office and U.S. Department of Agriculture, Interim Report on the Economic and Trade Agreement between the United States of America and the People’s Republic of China, AGRICULTURAL TRADE, October 23, 2020, Page 1.
For purposes of this post, I will look at the March-October data, but I will also reference January – October data.
Looking at U.S. domestic exports for the March – October period and projecting for full year 2020 shows China meeting 91.57% of first year agriculture commitments if the first year is measured from March 2020-February 2021 (an increase from 82.73% when March-September data were examined last month). Total Phase 1 products are projected at only 59.83% (up from 56.94% through September) of first year commitments for the March-February year with manufactured goods at 52.85 (up from 50.46% through September) and energy at 43.68% (down from 46.63% through September). If calendar year 2020 is examined, then total Phase 1 goods are projected to meet 53.19% (up from 51.40% through September) with manufactured goods at 52.10% (up from 50.85% through September), agricultural products at 69.97% (up from 65.49% through September) and energy goods at 35.51% (up from 35.33% through September). To meet first year commitments, China would have to import monthly 3.55 times the product from the United States as was done in the first eight months in the next four months (November – February)(up from 3.47 times for data through September) or 6.964.69 times the monthly imports from the United States in the two month period of November – December if a calendar year basis is examined (up from 4.9 times for data through September). Under the March-February analysis using data through October, the U.S. domestic exports of goods covered by Phase I to China would potentially exceed the actual 2017 U.S. exports ($90.168 billion projected vs. $86.795 billion 2017 actual). The calendar year projection is still $6.5 billion below the 2017 actual. Moreover, since non-covered U.S. exports have declined in 2020 versus 2017, under neither scenario do total U.S. domestic exports reach the 2017 level of $120 billion.
Moreover, there have been articles suggesting that Chinese purchases of major product categories (such as soybeans) will decline in coming months as various contracts get cancelled because of margins in China. See, e.g., Reuters, November 25, 2020, Chinese buyers look to cancel U.S. soybean orders as processing margins shrink, https://www.reuters.com/article/us-china-soybeans-cancellations/chinese-buyers-look-to-cancel-u-s-soybean-orders-as-processing-margins-shrink-idUSKBN28510H.
U.S. export data on services are available quarterly for some of the relevant categories and annually for certain information. Total U.S. services exports to all countries are down 19.74% for the first ten months months of 2020. Services trade data with China for 2020 is available for the first nine months of 2020 and shows U.S. exports of services down 41.51% from 2019 levels in the first half and down 42.36% in the third quarter of 2020 from 2019 levels. 2019 US exports of services to China were $36.398 billion, slightly lower than 2017 US exports of services to China of $36.986 billion. See U.S. Department of Commerce, U.S. Bureau of the Census, Bureau of Economic Analysis, U.S. International Trade in Goods and Services, October 2020 (December 4, 2020). The Phase 1 Agreement with China has large increases in U.S. services exports in the first year of the agreement ($12.8 billion over 2017 levels – to $49.786 billion). Thus, the limited data available indicate that U.S. services exports to China will likely miss 2017 levels by more than 40% and will obviously not show any gain above 2017.
Looking at total U.S. domestic exports of goods to China for the period March-October 2020, U.S. exports were $72.298 billion ($9.037 billion/month) compared to $77.043 billion in 2017 ($9.6306 billion/month). These include both products covered by the Annex 6.1 commitments and other products. For the January-October 2020 period total U.S. exports were $84.815 billion ($8.482 billion/month) compared to $95.404 billion in 2017 ($9.540 billion/month).
Total 2017 U.S. domestic exports of goods to China were $120.1 billion. The Phase 1 Agreement calls for increases on a subset of goods of $63.9 billion in the first year. Thus, the target for the first year of the U.S.-China Phase 1 Agreement is U.S. exports to China of $184 billion if non-subject goods are exported at 2017 levels.
Other U.S. domestic exports not covered by the 18 categories in Annex 6.1 were $33.314 billion in 2017 (full year). For the period March – October, non-covered products (which face significant tariffs in China based on retaliation for US 301 duties) have declined 19.97%, and total exports to China are down 6.16%. Looking at January – October figures show other U.S. domestic exports (i.e., not covered by the Phase I Agreement) were down 20.02% from comparable levels in 2017.
Thus, the first eight months since the U.S.-China Phase 1 Agreement went into effect suggest that U.S. domestic exports of the Annex 6 goods will be $90.168 billion if the full year shows the same level of increase over 2017 for each of the 18 categories of goods; non-covered products would be $26.661 billion, for total U.S. domestic exports to China of $116.829 billion. This figure would be below 2017 and dramatically below the target of $184.0 billion (if noncovered products remain are at 2017 levels; $177.339 billion with noncovered products at estimated 2020 levels) . The same is true if one looks at January-October 2020 which suggest full year 2020 exports of Annex 6 goods of $80.151 billion, other exports of $26.643 billion, for total domestic exports in 2020 of $106.794 billion even further behind 2017.
To achieve the target level of U.S. exports in the November 2020-February 2021 period, U.S. domestic exports of the 18 categories of goods in Annex 6.1 would have to be $96.439 billion ($24.109 billion/month) an amount that is 3.55 times the monthly rate of exports of the 18 categories to China in the March – October 2020 period ($6.782 billion/month).
If one uses January-September for comparison and for other US exports, with only two months data remaining in 2020, U.S. exports of goods covered by Annex 6.1 would have to be $87.712 billion or $43.856 billion/month which is 6.96 times the average of $6.298 billion of the January-October period.
Chinese data on total imports from all countries (in U.S. dollars) for January-October show a decline of 2.3% from the first ten months of 2019. http://english.customs.gov.cn/statics/report/monthly.html. General Administrator of Customs of the People’s Republic of China, China’s Total Export & Import Values, October 2020 (in USD). China’s imports from the U.S. were up 3.3% during the same time period, but show imports from the U.S. substantially larger than U.S. domestic exports ($103.9 billion vs. $84.8 billion, though Chinese imports would be CIF value vs. FAS value for U.S. exports and may include U.S. exports to third countries or territories that end up in China).
The 18 product categories included in Annex 6.1 of the Phase 1 Agreement show the following for March-September 2017, March-September 2020 and rate of growth for the first year of the Agreement versus full year 2017 (figures in $ million):
|Product category||March-October 2017||March-October 2020||% change 2017-2020 March-October||$ Value needed in next four months to reach 1st year of Agreement vs. projected 1st year|
|1. industrial machinery||$7,254.7|
|2. electrical equipment and machinery|| |
|3. pharma- ceutical products||$1,487.8||$2,012.7|
|4. aircraft (orders and deliveries)||$10,453.6||$2,784.1|| |
|5. vehicles||$6,957.3|| $3,970.4 ||-42.93%|
|6. optical and medical instruments|| $2,123.1|| $2,325.7|| |
|7. iron and steel|| |
|8. other manufactured goods||$7,067.5||$9,134.8||+29.25%|
|Total for mfg goods|
|13. other agricultural commodities|| $2,982.0|| $2,852.4|| |
|Total for agriculture||$10,768.7|
|15. liquefied natural gas|| |
|16. crude oil||$2,665.8||$5,063.2||+89.93%|
|17. refined products|| $1,515.0|| $1,100.0|| |
|Total for energy||$4,700.5||$6,844.8||+45.62%||$19,229.1|
|Total for 1-18||$54,498.7||$54,256.3||-0.44%||$96,438.7|
China has recovered more quickly from COVID-19 economic challenges than has the U.S. However, as reviewed above, their total imports from all countries are down in the first ten months of 2020 while up only 3.3% from the United States. Thus, while China has been increasing imports from the United States of some goods categories, it is extremely unlikely it will achieve the year one commitments of U.S. goods regardless of whether the first year is the calendar year 2020 or the twelve months March 2020 – February 2021.
As reviewed in prior posts, the U.S.-China Phase 1 Agreement is a potentially important agreement which attempts to address a range of U.S. concerns with the bilateral relationship and obtain somewhat better reciprocity with the world’s largest exporter. The Phase 1 Agreement has left other challenges to a Phase 2 negotiation which has not yet begun and will not begin before 2021 with the change of U.S. Administrations.
While there has been some progress on non-trade volume issues that are included in the Phase 1 Agreement and some significant improvements in exports of U.S. agricultural goods, there has been very little forward movement in expanding total U.S. exports of goods to China in fact and a sharp decline in U.S. exports of services to China.
The differences in economic systems between China and the United States have made reliance on WTO rules less relevant to the Trump Administration as those rules presume market-based economies and presently don’t address the myriad distortions that flow from the Chinese state capital system. Thus, the Phase I Agreement was an effort to move the needle in trade relations with China to achieve greater reciprocity. It has had some limited success to date. It will be interesting to see the approach on trade with China taken by the incoming Biden Administration.