U.S.-China Phase I Agreement

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 first year commitments [Updated Oct. 11, 2020]

U.S. August export data were released earlier this month. While there are some improvements in some categories of merchandise exports in August, China remains far behind its overall commitments in the U.S.-China Phase I Trade Agreement. as 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. The big question mark on the Phase 1 Agreement has been whether the agreement to increase imports from the United States is likely to be met by China. Prior posts on the U.S.-China Phase 1 Agreement can be found here: 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/.

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, the U.S. continues to report that China intends to honor its purchase commitments in this first year. 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 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). Including January and February data makes the achieving of first year objectives even more improbable as monthly U.S. domestic exports to China would have to be more than four times (4.07) the monthly average in January-August (compared to 2.41 times the monthly average if looking just at March-August) to meet a first year goal of $184.009 billion (which assumes U.S. exports of products not covered by Annex 6.1 are at 2017 levels).

A six month review of progress on the overall Phase 1 Agreement by the U.S. and China was held by phone on August 24, 2020, with U.S. noting that both parties are committed to ensuring the success of the agreement, including the purchases of U.S. goods.

As reviewed in earlier posts, some goods categories have data issues on the U.S. side (aircraft (orders and deliveries) show $0 exports for the entire period between 2017 and July 2020). Moreover, Amb. Lighthizer has testified to Congress that China has made some large agricultural purchases for shipments later in the year that don’t show up in the U.S. export data at the present time, although there are some increases in soybeans reported in August. Similarly, U.S. export data on services are available quarterly for some of the relevant categories and annually for certain information. However, services trade data with China for 2020 are not yet available. Total U.S. exports of services in the first half of 2020 to all countries was down 14.83%. Travel services were down more sharply, 46.32%. While the Phase 1 Agreement has large increases in U.S. services exports in the first year of the agreement ($12.8 billion over 2017 levels), the data doesn’t presently exist to measure progress on services under the Phase 1 Agreement, though it is believed that China is far behind on its commitments to increase U.S. exports of services.

Looking just at U.S. domestic export data for goods to China for the period March – August 2020, China is far behind meeting the ambitious purchase commitments made with the United States for the first year of the Agreement. It is even further behind if the January-August period is considered.

Looking at total U.S. domestic exports to China for the period March-August 2020, U.S. exports were $48.534 billion ($8.089 billion/month) compared to $55.019 billion in 2017 ($9.170 billion/month). These include both products covered by the Annex 6.1 commitments and other products. For the January-August 2020 period total U.S. exports were $61.051 billion ($7.631 billion/month) compared to $73.379 billion in 2017 ($9.172 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 $49.026 billion in 2017 (full year). For the period March – August, 2020 figures for the 18 categories have increased 8.92% from comparable levels in 2017 (with a large increase in August, as March-July had shown 4.19%). Non-covered products (which face significant tariffs in China based on retaliation for US 301 duties) have declined 37.85%, and total exports to China are down 11.79%. Looking at January – August, figures for the 18 categories declined 2.09% while other U.S. domestic exports were down 36.98% from comparable levels in 2017.

Thus, the first six 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 $78.663 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 $30.469 billion, for total U.S. domestic exports to China of $109.132 billion. This figure would be far below 2017, slightly below 2018 and 15.98% above 2019. It is obviously dramatically below the target of $184.0 billion. The same is true if one looks at January-August 2020 which suggest full year 2020 exports of Annex 6 goods of $68.527 billion, other exports of $30.896 billion, for total domestic exports in 2020 of $99.423 billion even further behind 2017 and 2018 and a smaller increase from the depressed 2019 data.

Even accepting the steep decline in non-covered goods using March-August as the relevant data, the first year should result in total U.S. domestic exports of $165.452 billion if the increase in covered goods is achieved — an amount 51.61% greater than current trends for total U.S. exports. To achieve that level of U.S. exports in the September 2020-February 2021 period, U.S. domestic exports of the 18 categories of goods in Annex 6.1 would have to be $101.589 billion ($16.931 billion/month) an amount that is 3.04 times the monthly rate of exports of the 18 categories to China in the March – August 2020 period ($5.566 billion/month).

If one uses January-August for comparison and for other US exports, 2020 should $165.879 billion as the commitment level which is higher than estimated 2020 figures based on the first eight months of 66.84%. With only four months data remaining in 2020, U.S. exports of goods covered by Annex 6.1 would have to be $93.430 billion or $23.357 billion/month which is 4.50 times the average of $5.194 billion of the January-August period.

Chinese data on total imports from all countries (in U.S. dollars) for January-August show a decline of 5.2% from the first eight 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, August 2020 (in USD). China’s imports from the U.S. were down 2.9% during the same time period, but show imports from the U.S. substantially larger than U.S. domestic exports ($78.241 billion vs. $61.051 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-August 2017, March-August 2020 and rate of growth for the first year of the Agreement versus full year 2017 (figures in $ million):

Product categoryMarch-August 2017March-August 2020% change 2017-2020 March-August$ Value needed in next six months to reach 1st year of Agreement vs. projected 1st year
manufactured goods
1. industrial machinery $5,489.8
$6,216.7

+13.24%
2. electrical equipment and machinery
2,153.6

$2,415.2

+12.15%
3. pharmaceutical products $1,215.5 $1,560.0
+20.11%
4. aircraft (orders and deliveries)* NA NA NA
5. vehicles $5,537.8
$2,490.4
-55.03%
6. optical and medical instruments
$1,579.8

$1,724.1

+9.13%
7. iron and steel
$621.3
$265.3
-57.30%
8. other manufactured goods $5,203.6 $6,959.6+33.75%
Total for mfg goods
$21,801.5

$21,531.1

-1.24%

$54,026.1**
Agriculture
9. oilseeds $1,676.7 $1,448.3 -13.62%
10. meat $290.4 $1,568.7+439.10%
11. cereals $782.6 $1,118.5+42.92%
12. cotton $427.8 $876.1+104.81%
13. other agricultural commodities
$2,326.9

$2,011.6

-13.55%
14. seafood $635.0 $386.3 -39.16%
Total for agriculture
$6,140.0

$7,409.5

+20.68%

$25,942.2
Energy
15. liquefied natural gas
$80.9

$397.3

+391.26%
16. crude oil $1,475.5 $3,298.4+123.55%
17. refined products
$902.2

$732.4

-18.82%
18. coal $258.2 $25.6 -90.10%
Total for energy
$2,716.3

$453.6

+63.93%

$21,620.3
Total for 1-18$30,658.2$33,394.2 +8.92% $101,588.6**
  • HS 8802 for aircraft shows no U.S. domestic exports to China for any month in the 2017-August 2020 period based on U.S. Census data as compiled by the U.S. International Trade Commission’s data web. U.S. export data don’t show orders just shipments.
  • The Phase 1 increase for manufactured goods and for all goods is overstated to the extent that the dollar value of increased purchases include aircraft, since U.S. domestic export data are not showing any shipments to China.

If one used January-August, manufactured goods were down 2.89% from 2017 levels and require $48.138 billion to be exported in the remaining four months of 2020 to reach the first year commitments ($12.035 billion/month). For agricultural goods, U.S. exports were down 6.86% from 2017 levels and require $23.744 billion to be exported in the remaining four months of 2020 to reach the first year commitments ($5.936 billion/month). On energy, U.S. exports were up 16.32% over 2017 levels and require exports of $21.547 billion in the remaining four months to reach first year commitments ($5.387 billion/month). For all Annex 6.1 goods, U.S. exports in the January-August period were down 2.09% with additional exports to meet first year commitments equal to $93.430 billion ($23.357 billion/month).

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 (and from the United States) are down in the first eight months of 2020. Thus, whether China will or can expand imports from the U.S. to the extent envisioned by the U.S.-China Phase 1 Agreement in the first year of its implementation is yet to be seen, but seems highly unlikely despite the position taken by the U.S. and by improved purchases of some U.S. goods in August.

Conclusion

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 at the earliest.

While there has been some progress on non-trade volume issues that are included in the Phase 1 Agreement as reviewed by USTR following the six month review call between the parties, there has been very little forward movement in expanding U.S. exports to China in fact. Indeed with the sharp contraction of U.S. exports of products not included in Annex 6.1 of the Phase 1 Agreement, the current trend lines will have U.S. total exports of goods to China coming in lower than was true in either 2017 or 2018 and only somewhat higher than the very depressed 2019 figures. More importantly, the trend line of U.S. domestic exports would result in China missing its first year target for purchases of U.S. goods by $56.32 – 74.88 billion (if use March-August) or by $66.46-84.58 (if use January-August). By back loading purchases of various U.S. agricultural products, China has projected to the U.S. greater efforts to meet purchase targets, and yet has done relatively little to effectuate expanded imports from the U.S. ahead of Presidential elections, now just a little more than three weeks away.

With the process of selecting a new Director-General for the World Trade Organization now down to selecting between the two candidates who have advanced to the final round of consultations, it is unclear when and if the WTO will be able to engage in meaningful reform efforts such that the large bilateral concerns between the U.S. and China can be brought back under the WTO or whether the world is in for many years of bilateral tensions with actions outside of the system the norm and not the exception.

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

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. The big question mark on the Phase 1 Agreement has to do with whether the agreement to increase imports from the United States is likely to be met. Prior posts on the U.S.-China Phase 1 Agreement can be found here: 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/.

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, the U.S. continues to report that China intends to honor its purchase commitments in this first year (assumed to be February 14, 2020-February 13, 2021).

A six month review of progress on the overall Phase 1 Agreement by the U.S. and China was held by phone on August 24, 2020. The U.S. Trade Representative’s summary of the call is copied below and can be found here – https://ustr.gov/about-us/policy-offices/press-office/press-releases/2020/august/statement-call-between-united-states-and-china.

“Statement on Call Between the United States and China

“08/24/2020

“Washington, DC – Ambassador Lighthizer and Secretary Mnuchin participated in a regularly scheduled call this evening with China’s Vice Premier Liu He to discuss implementation of the historic Phase One Agreement between the United States and China. The parties addressed steps that China has taken to effectuate structural changes called for by the
Agreement that will ensure greater protection for intellectual property rights, remove impediments to American companies in the areas of financial services and agriculture, and eliminate forced technology transfer. The parties also discussed the significant increases in purchases of U.S. products by China as well as future actions needed to implement the agreement. Both sides see progress and are committed to taking the steps necessary to ensure the success of the agreement.”

As reviewed in earlier posts, some goods categories have data issues on the U.S. side (aircraft (orders and deliveries) show $0 exports for the entire period between 2017 and July 2020). Moreover, Amb. Lighthizer has testified to Congress that China has made some large agricultural purchases for shipments later in the year that don’t show up in the U.S. export data at the present time. Similarly, U.S. export data on services are available quarterly for some of the relevant categories and annually for certain information. However, services trade data with China for 2020 are not yet available. Total U.S. exports of services in the first half of 2020 to all countries was down 14.83%. Travel services were down more sharply, 46.32%. While the Phase 1 Agreement has large increases in U.S. services exports in the first year of the agreement ($12.8 billion over 2017 levels), the data doesn’t presently exist to measure progress on services under the Phase 1 Agreement, though it is believed that China is far behind on its commitments to increase U.S. exports of services.

Looking just at U.S. domestic export data for goods to China for the period March – July 2020, China is far behind meeting the ambitious purchase commitments made with the United States for the first year of the Agreement.

Looking at total U.S. domestic exports to China for the period March-July 2020, U.S. exports were $38.963 billion ($7.792 billion/month) compared to $45.054 billion in 2017 ($9.011 billion/month). These include both products covered by the Annex 6.1 commitments and other products.

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 $49 billion in 2017 (full year). For the period March – July, 2020 figures for the 18 categories have increased 4.19% from comparable levels in 2017. Non-covered products (which face significant tariffs in China based on retaliation for US 301 duties) have declined 36.10%, and total exports to China are down 13.52%.

Thus, the first five months of the 1st year of the U.S.-China Phase 1 Agreement suggest that U.S. domestic exports of the Annex 6 goods will be $71.496 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 $31.306 billion, for total U.S. domestic exports to China of $102.802 billion. This figure would be far below 2017, below 2018 and just 9.25% above 2019. It is obviously dramatically below the target of $184.0 billion.

Even accepting the steep decline in non-covered goods, the first year should result in total U.S. domestic exports of $166.321 billion if the increase in covered goods is achieved — an amount 61.79% greater than current trends for total U.S. exports. To achieve that level of U.S. exports in the August 2020-February 2021 period, U.S. domestic exports of the 18 categories of goods in Annex 6.1 would have to be $108.705 billion ($15.529 billion/month) an amount nearly three times the monthly rate of exports of the 18 categories to China in the March – July 2020 period ($5.262 billion/month).

Chinese data on total imports from all countries (in U.S. dollars) for January-July show a decline of 5.7% from the first seven 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, July 2020 (in USD). China’s imports from the U.S. were down 3.5% during the same time period. Total U.S. domestic exports to China are down slightly more for the first seven months vs. 2019, 4.151%. China data for August are also available. Total imports into China for the first eight months of 2020 are down 5.2%, those from the United States down 2.9%.

The 18 product categories included in Annex 6.1 of the Phase 1 Agreement show the following for March-July 2017, March-Julye 2020 and rate of growth for the first year of the Agreement versus full year 2017 (figures in $ million):

Product categoryMarch-July 2017March-July 2020% change 2017-2020 March-July$ Value needed in next seven months to reach 1st year of Agreement vs. projected 1st year
manufactured goods
1. industrial machinery
$4,598.5

$5,142.9

+11.84%
2. electrical equipment and machinery
$1,780.1

$2,018.5

+13.39%
3. pharmaceutical products $1,082.5 $1,191.1
+10.03%
4. aircraft (orders and deliveries)* NA NA NA
5. vehicles
$4,472.0
$1,560.8
-65.10%
6. optical and medical instruments
$1,309.1

$1,431.8

+9.37%
7. iron and steel
$516.0
$206.3
-60.02%
8. other manufactured goods $4,319.7 $5,884.5
+36.22%%
Total for mfg goods
$18,077.9

$17,435.9

-3.55%

$58,121**
Agriculture
9. oilseeds
$1,221.3

$567.2

-53.56%
10. meat
$252.4

$1,363.8

+440.33%
11. cereals
$679.6

$783.7

+15.32%
12. cotton
$363.2

$661.6

+82.16%
13. other agricultural commodities
$1,986.4

$1,682.1

-15.32%
14. seafood
$460.9

$330.7

-28.25%
Total for agriculture
$4,963.8

$5,389.1

+8.57%

$27.995
Energy
15. liquefied natural gas
$68.7

$344.7

+401.75%
16. crude oil
$1,251.0

$2,541.5

+103.16%
17. refined products
$707.9

$573.4

-19.00%
18. coal
$183.0

$25.5

-86.07%
Total for energy
$2,210.6

$3,485.1

+57.65%

$22,589
Total for 1-18$25,252.3$26,310.1 +4.19% $108.705**
  • HS 8802 for aircraft shows no U.S. domestic exports to China for any month in the 2017-July 2020 period based on U.S. Census data as compiled by the U.S. International Trade Commission’s data web. U.S. export data don’t show orders just shipments.
  • The Phase 1 increase for manufactured goods and for all goods is overstated to the extent that the dollar value of increased purchases include aircraft, since U.S. domestic export data are not showing any shipments to China.

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 (and from the United States) are down in the first eight months of 2020. Thus, whether China will or can expand imports from the U.S. to the extent envisioned by the U.S.-China Phase 1 Agreement in the first year of its implementation is yet to be seen, but seems highly unlikely despite the position taken by the U.S.

Conclusion

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 at the earliest.

While there has been some progress on non-trade volume issues that are included in the Phase 1 Agreement, there has been very little forward movement in expanding U.S. exports to China. Indeed with the sharp contraction of U.S. exports of products not included in Annex 6.1 of the Phase 1 Agreement, the current trend lines will have U.S. total exports of goods to China coming in lower than was true in either 2017 or 2018 and only somewhat higher than the depressed 2019 figures. More importantly, the trend line of U.S. domestic exports would result in China missing its first year target for purchases of U.S. goods by $63.5 – 81.2 billion. By back loading purchases of various U.S. agricultural products, China can project greater efforts to meet purchase targets and yet not actually take the goods ahead of the forthcoming Presidential elections.

With the process of selecting a new Director-General for the World Trade Organization entering the final phase where Members will be winnowing down the list of eight candidates to one which hopefully will receive consensus support by early November, it is unclear when and if the WTO will be able to engage in meaningful reform efforts such that the large bilateral concerns between the U.S. and China can be brought back under the WTO or whether the world is in for many years of bilateral tensions with actions outside of the system the norm and not the exception.

U.S.-China Phase 1 Trade Agreement — Review of U.S. domestic exports through June 2020

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. See 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/.

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, the U.S. continues to report that China intends to honor its purchase commitments in this first year (February 14, 2020-February 13, 2021).

As reviewed in earlier posts, some goods categories have data issues on the U.S. side (aircraft (orders and deliveries) show $0 exports for the entire period between 2017 and June 2020). Moreover, Amb. Lighthizer has testified to Congress that China is making some large agricultural purchases for shipments later in the year that don’t show up in the U.S. export data at the present time. Similarly, U.S. export data on services are available quarterly for some of the relevant categories and annually for certain information. However, services trade data with China for 2020 are not yet available. Total U.S. exports of services in the first half of 2020 to all countries was down 14.83%. Travel services were down more sharply, 46.32%. While the Phase 1 Agreement has large increases in U.S. services exports in the first year of the agreement ($12.8 billion over 2017 levels), the data doesn’t presently exist to measure progress on services under the Phase 1 Agreement, though it is believed that China is far behind on its commitments to increase U.S. exports of services.

Looking just at U.S. domestic export data for goods to China for the period March – June 2020, China is far behind meeting the ambitious purchase commitments made with the United States for the first year of the Agreement.

Looking at total U.S. domestic exports to China for the period March-June 2020, U.S. exports were $31.0 billion ($7.761 billion/month) compared to $35.922 billion in 2017 ($.8.98 billion/month). In fact, 2018 shows the highest March-June exports to China ($40.998 billion ($10.249 billion/month). The March-June 2020 figures are below even 2019 which were $32.425 billion ($8.106 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 $49.026 billion in 2017 (full year). For the period March – June, 2020 figures for the 18 categories have increased 0.98% from comparable levels in 2017. Non-covered products (which face significant tariffs in China based on retaliation for US 301 duties) have declined 33.30%, and total exports to China are down 13.58%.

Thus, the first four months of the 1st year of the U.S.-China Phase 1 Agreement suggest that U.S. domestic exports will be $72.934 billion if the full year shows the same 0.98% increase over 2017; non-covered products would be $32.701 billion, for total U.S. domestic exports to China of $105.635 billion. This figure would be far below 2017, below 2018 and just 12.26% above 2019. It is obviously dramatically below the target of $184.0 billion.

Even accepting the steep decline in non-covered goods, the first year should result in total U.S. domestic exports of $167.683 billion if the increase in covered goods is achieved — an amount 58.7% greater than current trends for total U.S. exports. To achieve that level of U.S. exports in the July 2020-February 2021 period, U.S. domestic exports of the 18 categories of goods in Annex 6.1 would have to be $114.114 billion ($14.264 billion/month) an amount more than twice the monthly rate of exports of the 18 categories to China in the March – June 2020 period.

Chinese data on total imports from all countries (in U.S. dollars) for January-June show a decline of 6.4% from the first six 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, June 2020 (in USD). China’s imports from the U.S. were down 4.8% during the same time period. Total U.S. domestic exports to China are down slightly more for the first six months vs. 2019, -4.99%.

The 18 product categories included in Annex 6.1 of the Phase 1 Agreement show the following for March-June 2017, March-June 2020 and rate of growth for the first year of the Agreement versus full year 2017 (figures in $ million):

Product categoryMarch-June 2017March-June 2020% change 2017-2020 March-JuneGrowth to reach 1st year of Agreement vs. projected 1st year
manufactured goods
1. industrial machinery $3724.8 $4130.5 +10.89%
2. electrical equipment and machinery $1426.7 $1634.3 +14.55%
3. pharmaceutical products $920.2 $936.9 +1.82%
4. aircraft (orders and deliveries)* NA NA NA
5. vehicles $3,675.8 $1,269.7 -65.46%
6. optical and medical instruments $1,086.8 $1,143.0 +5.17%
7. iron and steel $417.6 $164.2 -60.67%
8. other manufactured goods $3,481.9 $4,738.8 +36.10%
Total for mfg goods$14,733.8$14,017.5 -4.86% +86.18%**
Agriculture
9. oilseeds $1,029.7 $411.2 -60.07%
10. meat $216.7 1,156.4+433.72%
11. cereals $486.5 $616.4 +26.71%
12. cotton $317.0 $460.3 +45.21%
13. other agricultural commodities $1,583.4 $1,319.1 -16.69%
14. seafood $357.7 $285.0 -20.32%
Total for agriculture $3,990.9 $4248.3 +6.45% +50.26%
Energy
15. liquefied natural gas $42.2 $300.5+611.23%
16. crude oil $1,125.9 $1,811.1 +60.86%
17. refined products $608.8 $433.8 -28.75%
18. coal $164.7 $57.8 -64.91%
Total for energy $1,941.7 $2603.2 +34.07% +156.78%
Total for 1-18$20666.4$20869.0 +0.98% +85.08%**
  • HS 8802 for aircraft shows no U.S. domestic exports to China for any month in the 2017-June 2020 period based on U.S. Census data as compiled by the U.S. International Trade Commission’s data web. U.S. export data don’t show orders just shipments.
  • The Phase 1 increase for manufactured goods and for all goods is overstated to the extent that the dollar value of increased purchases include aircraft, since U.S. domestic export data are not showing any shipments to China.

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 (and from the United States) are down in the first six months of 2020. Thus, whether China will or can expand imports from the U.S. to the extent envisioned by the U.S.-China Phase 1 Agreement in the first year of its implementation is yet to be seen.

Conclusion

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 almost certainly will not begin before 2021.

While there has been some progress on non-trade volume issues that are included in the Phase 1 Agreement, there has been very little forward movement in expanding U.S. exports to China. Indeed with the sharp contraction of U.S. exports of products not included in Annex 6.1 of the Phase 1 Agreement, the current trend lines will have U.S. total exports of goods to China coming in lower than was true in either 2017 or 2018 and only somewhat higher than the depressed 2019 figures. More importantly, the trend line of U.S. domestic exports would result in China missing its first year target for purchases of U.S. goods by $62 – 78.4 billion.

The bilateral relationship is under increasing strains reflecting both reactions to China’s actions vis-a-vis Hong Kong, the disagreements on the COVID-19 pandemic, ongoing concerns in the United States about possible cyber espionage by Chinese entities which has resulted in the closure of a Chinese consulate in the U.S. and a retaliatory closure of one of the U.S. consulates in China, among other current flash points.

In such circumstances, it is hard to know whether China will fully implement the bilateral agreement or be willing to move forward on a Phase 2 negotiation. While the January – June data support a possible lack of interest by China in fulfilling the purchase agreement provisions, China has released its July data which show a significant increase in imports from the U.S. to $11.276 billion in July which is at least an improvement over the monthly figures for March-June ($7.761 billion/month). On the prospect for interest by China in addressing a Phase 2 negotiation, U.S. intelligence has indicated that China is hoping for a regime change in the U.S. through the November elections, a reading, if correct, which supports a likely wait-and-see approach on any renewed interest in negotiations.

Similarly, it is hard to know if the U.S. will view the agreement as being implemented by China sufficiently to move to the next stage. As the U.S. Administration is in full campaign mode, it is likely the U.S. Administration perceives more electoral value in identifying practices of concern by China than pursuing forward movement on any Phase 2 negotiations. The long distance that exists between current export levels and Agreement targets could well lead the U.S. to view the agreement on the subject of expanded exports to China as not being met and to pursue tariff action under the Agreement. September or October would be the likely months if there are not significant increases in trade volume. As noted, China reports significantly increased imports from the U.S. in July and USTR Lighthizer has indicated that there are large purchases of agricultural goods for late year delivery that are not reflected in U.S. export data. Thus, facts on the ground may lead to focusing Administration concerns with China on issues not involving the Phase 1 Agreement.

What is clear is that trade frictions between the world’s two largest economies are serious, reflect fundamental differences in economic systems, and are complicated by a myriad of other differences between the two nations.

U.S.-China Phase 1 Trade Agreement — Limited Progress on Increased U.S. Exports to China (through May)

While both China and the U.S. have taken steps to implement parts of the Phase 1 Agreement that took effect on February 14, 2020, the track record through May 2020 doesn’t show significant growth in U.S. exports to China overall (in fact the opposite) or in the 18 goods categories identified in Annex 6.1. Services exports are believed to be down significantly because of the large share of total U.S. services exports to China that have been in travel and tourism and the sharp contraction in 2020 due to efforts to deal with the COVID-19 pandemic.

Looking at total U.S. domestic exports to China for the period March-May 2020, U.S. exports were $22.9 billion ($7.638 billion/month) compared to $27.1 billion in 2017 ($.9.034 billion/month) and were $24.2 billion in 2019 ($8.071 billion/month). Total 2017 U.S. domestic exports of goods to China were $119.9 billion. The Phase 1 Agreement calls for increases on a subset of goods of $63.9 billion in the first year. Even if all other exports (other than the 18 subcategories specified in the annex) were simply equal to 2017, this would be an increase in the first year of 53.9%. By contrast, in the first three full months after the agreement, U.S. domestic exports are down 15.5%. However, there have been increases from the January-February 2020 period as shown below:

January 2020 $6,488,386,365

February 2020 $6,028,423,474

March 2020 $6,960,879,230

April 2020 $7,381,615,579

May 2020 $8,571,128,814

Thus, U.S. exports in May were close to the monthly average from 2017 for March – May and were 94% of May 2017 in May 2020.

Chinese data on total imports from all countries (in U.S. dollars) for January-May show a decline of 8.2% from the first five months of 2019. General Administrator of Customs of the People’s Republic of China, China’s Total Export & Import Values, May 2020 (in USD). Total U.S. domestic exports to China are down slightly less for the first five months vs. 2019, -6.8%.

The 18 product categories included in Annex 6.1 of the Phase 1 Agreement show the following for March-May 2017, March-May 2020 and rate of growth for the first year of the Agreement versus full year 2017 (figures in $ million):

Product categoryMarch-May 2017March-May 2020% change 2017-2020 March-MayGrowth for 1st year of Agreement
manufactured goods
1. industrial machinery $2,807.5 $3,147.2 +12.1%
2. electrical equipment and machinery $1,056.6 $1,259.3 +19.2%
3. pharmaceutical products $734.1 $729.3 -0.7%
4. aircraft (orders and deliveries)* NA NA NA
5. vehicles $2,679.4 $788.7 -70.6%
6. optical and medical instruments $787.8 $868.0 +10.2%
7. iron and steel $329.5 $128.4 -61.1%
8. other manufactured goods $2,614.7 $3,509.8 +34.2%
Total for mfg goods$11,009.6$10,430.7 -5.3% +77.5%**
Agriculture
9. oilseeds $898.2 $292.0 -69.5%
10. meat $163.2 $918.6+463.2%
11. cereals $384.6 $421.0 +9.5%
12. cotton $278.7 $311.5 +11.8%
13. other agricultural commodities $1,239.2 $996.0 -19.6%
14. seafood $291,0 $229.9 -21.0%
Total for agriculture $3,254.9 $3,169.0 -2.6% +59.9%
Energy
15. liquefied natural gas $42.2 $259.8+515.6%
16. crude oil $944.9 $1,148.2 +26.9%
17. refined products $520.9 $274.7 -47.3%
18. coal $134.3 $25.5 -81.0%
Total for energy $1,642.3 $1,708.2 +4.0% +144.3%
Total for 1-18$15,906.8$15,307.9 -3.8% +90.1%**
  • HS 8802 for aircraft shows no U.S. domestic exports to China for any month in the 2017-May 2020 period based on U.S. Census data as compiled by the U.S. International Trade Commission’s data web. U.S. export data don’t show orders just shipments.
  • The Phase 1 increase for manufactured goods and for all goods is overstated to the extent that the dollar value of increased purchases include aircraft, since U.S. domestic export data are not showing any shipments to China.

The U.S. Trade Representative, Ambassador Robert Lighthizer, in testimony to the House Ways and Means Committee and the Senate Finance Committee in June when asked about the U.S.-China Phase 1 Agreement and whether he expected China to fulfill its purchase commitments, focused on agricultural exports and indicated that for major export categories, like soybeans, there were large orders in the pipeline and shipments were heavily weighted to the end of the year. Thus, the early months of actual exports for at least some agricultural categories were not viewed as representative of the level of purchases from the U.S. by China that are ongoing. Soybeans were the most important U.S. export of agricultural products in 2017 with exports of more than $12 billion. Thus, how well U.S. agricultural interests do in the remainder of 2020 depend heavily on how large the purchases of soybeans that get shipped actually will be.

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 (and from the United States) are down in the first five months of 2020. Thus, whether China will or can expand imports from the U.S. to the extent envisioned by the U.S.-China Phase 1 Agreement in the first year of its implementation is yet to be seen.

There is, of course, wide variability in U.S. export performance by product category and within product category by individual products. Some categories of U.S. exports have seen large rates of growth. Meat is one such category. Liquefied natural gas is another. With the huge consumption of pork in China and in light of the challenges China has faced with the health of its own pigs, there has been a very large increase in pork exports to China during 2020 for the U.S. On beef, where China had largely stopped importing most types of U.S. beef after an animal was diagnosed withbovine spongiform encephalopathy (BSE) in Washington many years ago, there are some exports from the U.S. starting to show up in the March-May time period.

But there are also large declines on categories of importance to the U.S., such as motor vehicles, though much of the decline is presumably due to the sharp contraction in purchases in China during the early months of 2020 and to the additional duties imposed by China.

For categories where there are increases in U.S. domestic exports over 2017, it may also be the case that there has been an acceleration of U.S. domestic exports to China since the Agreement went into effect. For example, the category of industrial machinery which has March-May US exports up 12.1% saw a much larger increase from the levels of exports in January-February 2020. Specifically, the US exports under the category had averaged $745.6 million each month in the first two months and then increased 40.7% in the next three months, averaging $1.049 billion each month. Thus, large increases are certainly possible in many categories and many individual products based on Chinese demand and past experience.

Some sectors where China purchases via state-owned or state-invested entities can see both sharp declines in purchases and, when China chooses to, sharp increases in purchases. Thus, on liquefied natural gas, US domestic exports to China were $0 for both January and February 2020 but then ramped up to $58.7 million in March and roughly $100 million in each of April and May. Similarly, crude oil exports from the U.S. were $0 in both January and February but jumped to just under $1 billion in May.

Considering importance of the Agreement, Administration could improve transparency through periodic update reports

It would be useful if the U.S. government provided monthly data reviewing progress under the Phase 1 Agreement which would permit an understanding of future purchases and of orders of aircraft so complete data are available. The Peterson Institute for International Economics has a U.S.-China Phase One Tracker which looks at data on a more aggregate data level and looks at the full year 2020, even though the Agreement did not kick in until February 14, 2020. See https://www.piie.com/research/piie-charts/us-china-phase-one-tracker-chinas-purchases-us-goods. Thus, a monthly report that provides the Administration’s understanding of shipments and purchases would fill existing gaps in data and improve the public’s understanding of whether the Agreement is fulfilling the purchase commitments. It would also be helpful if the Administration provided an overview of all provisions contained in the Agreement and if changes have been made to laws, regulations or otherwise, and, if made, whether the market barriers of concern to U.S. companies are in fact now removed.

Conclusion

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. With the complexities in the bilateral relationship flowing from a wide range of trade and non-trade events, it is hard to know whether China will fully implement the bilateral agreement or be willing to move forward on a Phase 2 negotiation. Similarly, it is hard to know if the U.S. will view the agreement as being implemented by China sufficiently to move to the next stage. A more sustainable trade relationship should be in both countries’ interest. But trade is, of course, just one important topic in a series of topics where the U.S. and China have very different views which can complicate forward movement on trade.

For the public, the Administration could improve an understanding of how the Agreement is being implemented by providing periodic updates of how all elements in the agreement are being implemented, how U.S. companies are viewing the changes on the ground in China, and how the Administration sees the U.S. export data that comports with the Annex 6.1 objectives.

U.S. approach to trade – USTR Lighthizer’s Foreign Affairs article and Congressional testimony on June 17

Every year, the U.S. House of Representative’s Committee on Ways and Means and the U.S. Senate Finance Committee hold hearings to understand the Administration’s trade agenda for the year. This year both Committees held hearings on June 17 where the sole Administration witness was U.S. Trade Representative Robert Lighthizer.

Ambassador Lighthizer had separately prepared an article for Foreign Affairs entitled “How to Make Trade Work for Workers, Charting a Path Between Protectionism and Globalism” which had been reviewed by many of the Committee members prior to the hearings. The article is available here and presents the Trump Administration’s approach to trade policy. https://www.foreignaffairs.com/articles/united-states/2020-06-09/how-make-trade-work-workers.

The Foreign Affairs article

Ambassador Lighthizer uses the challenges of the COVID-19 pandemic to state that it is time for discussions to reach a new consensus on “the future of U.S. trade policy.” Amb. Lighthizer’s summary of the approach of the current Administration are repeated below:

“That debate should start with a fundamental question: What should the objective of trade policy be? Some view trade through the lens of foreign policy, arguing that tariffs should be lowered or raised in order to achieve geopolitical goals. Others view trade strictly through the lens of economic efficiency, contending that the sole objective of trade policy should be to maximize overall output. But what most Americans want is something else: a trade policy that supports the kind of society they want to live in. To that end, the right policy is one that makes it possible for most citizens, including those without college educations, to access the middle class through stable, wellpaying jobs.

“That is precisely the approach the Trump administration is taking. It has broken with the orthodoxies of free-trade religion at times, but contrary to what critics have charged, it has not embraced protectionism and autarky. Instead, it has sought to balance the benefits of trade liberalization
with policies that prioritize the dignity of work.”

The paper reviews the history of trade liberalization, what the Administration views as its limits, their perception that many trade advocates have extolled the benefits of liberalization while discounting or ignoring the economic costs of liberalization. Unlike other areas of government policy, trade liberalization was viewed as an absolute good and not weighed against the costs of the policy in fact.

The section of the article entitled “The dark side of free trade” reviews the steep economic and human costs for the United States over the period 2000-2016 noting the loss of manufacturing jobs, stagnation of median household incomes, and the devastation to the populations left behind in manufacturing locations. While outsourcing reduces costs, it increases vulnerabilities and reduces the nation’s ability to respond to certain situations, such as the pandemic.

Amb. Lighthizer opines that “A sensible trade policy strikes a balance among economic security, economic efficiency, and the needs of working people.” He reviews how he believes the United States-Mexico-Canada Agreement (“USMCA”) achieves that balance looking at specific improvements from NAFTA.

The article then goes on to look at “two of the most significant trade challenges [the U.S.] will face in the coming years: market-distorting state capitalism in China and a dysfunctional WTO.”

The Trump Administration changed the approach of trying to deal with China’s trade policy issues pursued by prior Administration (e.g., through bilateral talks and through the WTO dispute settlement system) by going after some of the larger issues through the section 301 investigation with resulting tariffs on imports from China which led to the creation of the Phase 1 Agreement and, depending on success of Phase 1, a potential Phase 2.

On the WTO, the article focuses on the WTO’s Appellate Body and its deviation from its original purpose.

“The challenges in the WTO are also vexing. Like many international organizations, the WTO has strayed from its original mission. Designed as a forum for negotiating trade rules, it has become chiefly a litigation society. Until recently, the organization’s dispute-resolution process was led by its seven-member Appellate Body, which had come to see itself as the promulgator of a new common law of free trade, one that was largely untethered from the actual rules agreed to by the WTO’s members. The Appellate Body routinely issued rulings that made it harder for states to combat unfair trade practices and safeguard jobs. This was one of the reasons why the Trump administration refused to consent to new appointments to it, and on December 11, 2019, the Appellate Body ceased functioning when its membership dipped below the number needed to hear a case.

“The United States should not agree to any mechanism that would revive or replace the Appellate Body until it is clear that the WTO’s dispute-resolution process can ensure members’ flexibility to pursue a balanced, worker-focused trade policy. Until then, the United States is better off resolving disputes with trading partners through negotiations—as it did from 1947, when the General Agreement on Tarifs and Trade was signed, until 1994, when the WTO was created—rather than under a made-up jurisprudence that undermines U.S. sovereignty and threatens American jobs.”

Congressional Hearings

The Congressional hearings provide the opportunity for the Administration to present its record of accomplishments as well as identifying pressing issues being pursued and for members of Congress to inquire about specific issues of importance to their constituents, to challenge the narrative of the Administration (typically by the opposition party), to press for commitments on actions deemed of importance and otherwise to gain clarification of matters of interest to Congressional members.

Yesterday’s hearings had all of the above. Amb. Lighthizer’s opening statement to both Committees stressed what the Administration viewed itself as having achieved and the benefits to working Americans with a focus on China (and the US-China Phase 1 Agreement), USMCA, the US-Japan Phase 1, disputes at the WTO and WTO reform proposals as well as the Administration’s game plan for the WTO, for pending negotiations with the U.K. and Kenya and for WTO reform, and enforcement of existing agreements. His opening statement to the U.S. Senate Finance Committee is embedded below but mirrors his prepared statement to the U.S. House Ways and Means Committee.

17JUN2020LIGHTHIZERSTMNT1

Senate Finance Committee Ranking Member Wyden (D-OR) in his opening statement painted a different picture of the first three years of the Trump Administration’s trade agenda and whether successes had been achieved. His statement is embedded below.

061720-Wyden-Trade-Agenda-Hearing-Opener1

There were many questions in both chambers on the USMCA agreement, with particular focus on enforcement of labor, environment and other issues. With the final revised USMCA receiving strong bipartisan support in both houses of Congress and with the agreement taking effect on July 1st, many of the questions flagged areas where one of the countries was viewed as not in compliance with obligations in the Agreement (e.g., energy practices in Mexico) and commitments by Amb. Lighthizer to pursue matters where compliance wasn’t in place.

On the issue of Section 232 tariffs on steel and aluminum products from Canada and Mexico, some members inquired whether examining imposition of such tariffs would be consistent with U.S. agreement with the two countries which had excluded them from the additional tariffs. Amb. Lighthizer reviewed that the agreement excluded Canada and Mexico where volumes remained at historic levels. If the U.S. found surges and decided to impose the tariffs, any retaliation by Canada or Mexico would be limited to the same sectors (i.e., could not retaliate against agricultural products). Amb. Lighthizer indicated that the U.S. was considering whether tariffs should be imposed in light of surges that had been occurring.

There were also many questions about the U.S.-China Agreement with a focus on whether China was likely to meet its obligations on the purchase of goods (with most questions focused on agricultural purchases). Ranking Member Wyden (D-OR) cited a Peterson Institute paper claiming poor compliance with purchase commitments. See https://www.piie.com/research/piie-charts/us-china-phase-one-tracker-chinas-purchases-us-goods Amb. Lighthizer on a number of occasions reviewed what were described as inadequacies in the Peterson data and reviewed strong growth in orders from China on agricultural goods to the present time (vs. exports through April shown in the Peterson graphs which look at January-April, even though the agreement didn’t take effect until February 14, 2020).

There were many questions about reshoring manufacturing of medical goods, particularly personal protective equipment (“PPE”), challenges to such reshoring because of the failure of the Administration to enter into long-term contracts to permit manufacturing to start up, whether broader tariff exclusions should be provided to imports of such products while there were inadequate supplies, concerns about existing supplies of PPEs amidst the ongoing pandemic. The issue featured prominently in Senate Finance Committee Chairman Grassley’s (R-IA) opening statement and in the questions of a number of Senators and House Representatives in the two sessions. Amb. Lighthizer discussed use of tariffs as a longer term issue to support reshoring and contested arguments that the Administration had not done enough to secure supplies during the pandemic. Chairman Grassley’s opening statement is embedded below.

Grassley-at-Hearing-on-the-President

There was also interest in both Houses of the ongoing or soon to be initiated FTA negotiations with the United Kingdom (ongoing, two rounds completed) and with Kenya (to start after July 4). There were questions or statements of support for the U.S.-Japan Phase 1 Agreement particularly by members with agricultural export interests to Japan.

On U.S.-EU trade relations, there were a few questions raised dealing either with the perceived abuse of geographical indications on food products by the EU and its push to get other countries to accept EU indications or with changing EU SPS provisions that appear to members of Congress and USTR as not science based. Amb. Lighthizer characterized both as protectionist trends from our friends in the EU. He also indicated that USTR is considering whether the U.S. should initiate a 301 investigation on the non-science based SPS measures.

On digital services taxes, questions arose about yesterday’s announced U.S. withdrawal from the OECD negotiations. Amb. Lighthizer reviewed USTR’s role in conducting 301 investigations first on France and now on a host of other countries where taxes are being imposed or considered on digital services on a discriminatory basis and on companies with no physical presence in countries imposing the taxes. The OECD effort was started to achieve a global agreement that could be accepted by all. The U.S. withdrew from the talks based on its view that the talks were building in discrimination against U.S. companies. If there is not a solution in the OECD, Amb. Lighthizer made it clear that results from the 301 investigations would permit the U.S. to take appropriate action against countries who proceed without a global agreement.

While Amb. Lighthizer’s opening statement had reviewed various WTO issues relevant to reform efforts — addressing Appellate Body; putting teeth into WTO notification requirements; clarifying which Members are eligible for special and differential treatment, and the concern about bound tariffs which have proven not to reflect current economic realities between countries, there were few questions about WTO reform during the two hearings. Amb. Lighthizer did go through the challenge of a WTO system where tariffs are bound, where the U.S. over 70 years has removed the vast majority of its tariffs and many other countries have maintained very high bound and even applied tariffs with little likelihood that those tariffs would be reduced regardless of the economic advances made by countries with high bindings. India and Indonesia were two of the countries used as examples of where bound tariffs today of such countries were not reflective of their economic advances and hence were unfair to the U.S.

There were also questions that arose from press reports about statements President Trump allegedly made to President Xi in Japan seeking China’s help in his reelection effort and to reports about two USTR professional staff members who had set up a webpage and been contacting automotive companies about helping them with USMCA compliance at a time when they were still USTR employees. Amb. Lighthizer was in a meeting with the U.S. and Chinese Presidents in Osaka, Japan in 2019 and denied that any request for assistance was made by President Trump at that meeting. On the latter issue, Amb. Lighthizer indicated that political appointees clearly could not do what was done by professional staff and that the professional staff had reportedly sought and obtained clearance from the USTR ethics office.

Conclusion

It has long been obvious that the Trump Administration was adopting a significantly different approach to trade policy than had been pursued by prior Administrations over recent decades. Ambassador Lighthizer’s Foreign Affairs article provides an articulation of the underlying concerns that have driven the Administration to the current policy approach. While there are many who remain skeptical about the benefits vs. costs flowing from the modified approach being pursued by the Trump Administration, there is little question that the change in approach has gotten attention of trading partners and at least some important modifications in agreements.

The USMCA has many novel elements, many of which are interconnected in terms of achieving stated objectives. Changes in rules of origin coupled with a high level of labor needing to make a minimum level of hourly wages and labor enforcement provisions are intended to address longstanding concerns of labor and is consistent with Amb. Lighthizer’s articulated objective of making trade work for workers. The willingness to work with the Democrats to achieve the labor and environment provisions contained in the revised agreement objectives permitted broad bipartisan support when implementing legislation was considered in the United States. Similarly, the USMCA provision of a sixteen year sunset of the agreement, extendable every six years should permit Canada, Mexico and the United States to update the agreement on a regular basis preventing the loss of relevance or coverage that normal FTAs have experienced with the passage of time.

On the importance of the U.S. relationship with China, the current Administration has come to the conclusion that China is not interested in converting to a market economy in fact. Reciprocity is unlikely under WTO Agreements since the WTO is premised on market economy Members, and the WTO agreements do not address many of the distortions flowing from the Chinese-style economy. Thus, the Administration has pursued a different approach to achieve a different outcome and greater reciprocity. The importance of the U.S.-China Phase 1 is best understood in that context. While the jury is out on how successful the Phase 1 Agreement will be, Amb. Lighthizer’s review of USTR information on growing orders from China in agriculture and China’s implementation of many of the specific commitments in the SPS area and other areas is encouraging.

On the WTO, the U.S. is looking for fundamental reform to achieve an organization that has rules for all and that reflects the changing capabilities of Members. With the differences in views of the purpose of the Appellate Body between the U.S. and the EU (and others), there is no likelihood of rapid restoration of the Appellate Body. With the EU moving towards taking unilateral action against Members who don’t engage in a second stage review of disputes with them, we are likely facing a period of heightened trade tensions between the U.S. and the EU.

Other U.S. proposals that have already been made at the WTO (notification requirements; eligibility for special and differential treatment; WTO being an organization for market economies ) or are working on jointly with others (e.g., EU and Japan on industrial subsidies and state-owned enterprises), have different challenges in terms of reaching consensus to adopt. The issue not yet formally raised on revisiting tariff bindings and/or how the system addresses changes in economic might over time with existing bindings would seem to require a further major shock to the operation of the WTO to have any chance of being considered.

As trading partners struggle to find new sources of revenue, particularly following the economic challenges flowing from the COVID-19 pandemic, many have looked to tax foreign companies in the digital services space. As the U.S. has many of the major players, there are looming major confrontations over EU and other country efforts to impose discriminatory taxes. The U.S. will defend its interests if an OECD agreed approach cannot be found. Based on yesterday’s withdrawal of the U.S. from the OECD process, major disputes are likely by the end of 2020.

The Trump Administration will continue to utilize all legal tools available to it under U.S. law and pursuant to various Agreements to achieve a rebalancing of the U.S. trade relationship with our major trading partners and with all nations. The Foreign Affairs article provides the Administration’s logic for the approach being pursued.

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

The U.S.-China Phase I trade agreement went into effect in mid-February just as the COVID-19 pandemic was rapidly spreading globally.  In the United States, the U.S. Trade Representative and U.S. Secretary of Agriculture have released a series of statements indicating that China has been making a number of the substantive changes that were contained in the agreement, with the U.S. being pleased with the progress.  See, e.g. https://ustr.gov/about-us/policy-offices/press-office/press-releases/2020/may/usda-and-ustr-announce-continued-progress-implementation-us-china-phase-one-agreement

The COVID-19 pandemic has seriously reduced economic activity in the United States and in many other countries.  Despite such reduced economic activity in recent months, the U.S. Administration has remained optimistic about China’s meeting the agreement’s terms and the agreement being “a success,” including the significant increase in exports to China from the United States over two years (2020-2021).  https://ustr.gov/about-us/policy-offices/press-office/press-releases/2020/may/usda-and-ustr-announce-continued-progress-implementation-us-china-phase-one-agreement.  An important measure of the success will be the extent to which there are significant increases in U.S. exports.

As reviewed in a recent post, the United States has announced it will be terminating special status of Hong Kong in light of Chinese security actions taken vis-a-vis Hong Kong.  U.S. Withdrawal from the World Health Organization and Decision to Revoke Preferential Treatment for Hong Kong – Reduced Cooperation as COVID-19 Pandemic Rages On, https://currentthoughtsontrade.com/2020/05/30/u-s-withdrawal-from-the-world-health-organization-and-decision-to-revoke-preferential-treatment-for-hong-kong-reduced-cooperation-as-covid-19-pandemic-rages-on/.  U.S. action did not call for the termination of the US-China Phase I Agreement.  In recent days, the press have reported that China has ordered state-owned entities to stop purchasing from the United States various agriculture products, including soybeans, pork, corn and cotton.  https://thehill.com/policy/finance/trade/500464-china-halts-state-purchases-of-us-soybeans-pork-report.  There have been some statements in the U.S. press suggesting that China continues to buy U.S. agricultural products including soybeans despite the earlier reports to the contrary.  See, e.g.,   https://insidetrade.com/trade/grassley-confident-china-will-meet-phase-one-commitments.

With April 2020 U.S. export data now available, what is clear is that China is far behind in meeting the levels of purchases from the United States in a wide range of goods categories to meet the first year growth over 2017 on goods of $63.9 billion.  Total U.S. domestic exports to China in 2017 were $119.910 billion.  The $63.9 billion increase of U.S. exports of goods were on a subset of total U.S. goods exports, just $66.381 billion.  Thus, the rate of increase in the first twelve months under the agreement is expected to be 96.26% on the categories contained in Annex 6.1 to the Agreement.  There are specific commitments with regard to certain manufactured goods (increase of $32.9 billion over 2017 levels), agriculture (increase of $12.5 billion over 2017 levels) and energy (increase of $18.5 billion over 2017 levels).  While there are no specific commitments on other products the U.S. exports to China, the rate of increase as measured against all U.S. domestic exports to China in 2017 would be 53.29% if all other products were at the same level as in 2017.

Unfortunately, looking just at March and April 2020 (the first two full months after the agreement took effect for which U.S. export data are available), U.S. domestic exports of the products contained in Annex 6.1 to the agreement declined by 4.04% from the March-April 2017 period.  All other U.S. domestic exports of goods to China declined 39.35% in March-April 2020 compared to the same period in 2017.  In total U.S. domestic exports to China of all products declined by 20.24% in March-April 2020 compared to the same months in 2017.  Thus, the early months of the first year of the Phase I Agreement are moving in the wrong direction in terms of U.S. exports.  While challenges in China and in the United States from the pandemic have undoubtedly dampened both demand in China and ability to ship from the U.S. for some products, that situation has changed in May and will presumably improve moving forward.

The above figures do not account for increased U.S. services exports to China contained in Annex 6.1 to the agreement (increase of $18.5 billion over 2017 levels).  Data for U.S. services exports for 2020 are not available by country at this point for January-April.  But overall U.S. services exports have been hard hit in the first four months of 2020 and this will include U.S. exports to China.  U.S. exports of services to the world were $169.482 billion in the January-April 2020 time frame, down from $193.010 billion in 2019, with March and April 2020 being more sharply contracted, $72.117 billion vs. $97.103 billion in 2019.  See https://www.census.gov/foreign-trade/Press-Release/current_press_release/ft900.pdf (page 16).

The table below shows the 18 categories of goods for which there are growth commitments in Annex 6.1 of the Agreement.  All figures are in U.S.$ billions.

Product CategoryMarch-April 2017March-April 2020Change
Manufactured goods
1. Industrial machinery$1.845$2.091+$0.246
2. Electrical Equipment
and machinery
$0.694$0.867+$0.173
3. Pharmaceutical
products
$0.323$0.501+$0.178
4. Aircraft (orders and
deliveries
$0$0 $0
5. Vehicles$1.747$0.716-$1.031
6. Optical and medical
instruments
$0.522$0.566+$0.044
7. Iron and steel$0.232$0.081-$0.151
8. Other manufactured
goods
$1.737$2.224+$0.487
Subtotal — MFG goods$7.099$7.046-$0.053
Agriculture
9. Oilseeds$0.747$0.230-$0.517
10. Meat$0.106$0.582+$0.476
11. Cereals$0.224$0.194-$0.030
12. Cotton$0.229$0.200-$0.029
13. Other agricultural
commodities
$0.000$0.354+$0.354
14. Seafood$0.231$0.152-$0.079
Subtotal – Agriculture$1.536$1.712+$0.175
Energy
15. Liquefied natural
gas
$0.014$0.162+$0.148
16. Crude oil$0.658$0.210-$0.448
17. Refined products$0.334$0.193-$0.241
18. Coal$0.090$0.016-$0.074
Subtotal – Energy$1.096$0.581-$0.515
Total of 1.-18.$9.731$9.339-$0.392

Conclusion

The Trump Administration has had an aggressive program over the last several years to address perceived serious problems in our bilateral relationship with China. The Phase I Agreement was viewed as a down payment with the more challenging issues still on the table to be negotiated in a phase 2 agreement. There is no sign that Phase 2 negotiations have started. The history of U.S.-China consultations has been a great many promises of change by China and relatively little action by China to address U.S. concerns.

It is a positive that a number of the specific changes China has agreed to in the Phase I Agreement have been implemented to date. The U.S. has also made modifications it agreed to make in the Phase I Agreement. But the core issue for the Trump Administration is to see if its different approach to China can achieve meaningfully greater reciprocity in our trade relationship with China. That has been the justification for the large tariff increases on large parts of Chinese exports — getting long overdue changes to Chinese actions that harm American businesses and workers and obtain greater market access to the Chinese market.

Through April, U.S. trade data don’t show meaningful expansion of exports to China despite the commitments contained in Annex 6.1 to the Agreement. Indeed, U.S. exports are down sharply to China (U.S. imports from China are down sharply as well).

Despite the ongoing bilateral differences and actions causing a continuation of tensions between the two largest economies in the world, improving bilateral trade to a more reciprocal level would be in both countries’ interest. With China having recovered from COVID-19 constraints and with the U.S.having started its reopening process, the coming months will reveal whether the Agreement represents a further lost opportunity or a sea change in trade flows.

Continued Stress in U.S.-China relations — Reduced Cooperation in Multilateral Fora

The two largest economies in the world view each other as competitors and potential adversaries. With significantly different political and economic systems and ideologies, the United States and China have had different perspectives on commitments and obligations undertaken in the economic sphere.

U.S. concerns

Specifically, the United States has viewed its bilateral trade negotiations with China and the later conclusion of China’s accession to the World Trade Organization (“WTO”) as having created a commitment by China to continue on market-based reforms with the eventual conversion of the Chinese economy into a market-economy consistent with the basic rules of the WTO. There have been high level dialogues between the two countries for years with a feeling in the U.S. that repeated commitments by China to fulfill commitments have not been honored and that the bilateral relationship had growing serious problems.

China concerns

China has had a different view of the world and its obligations to other countries through its joining the WTO. Reforms continued for a while but were replaced with a growing focus on state direction, state investment and heavy subsidization of a widespread number of sectors. China has viewed the United States as attempting to prevent its economic growth and global role and as not respecting its “right” to view itself as a developing country within the WTO and hence to have fewer obligations than a developed country.

Trump Administration changes approach

Under the Trump Administration, the United States has taken a more aggressive approach to dealing with what it perceives as distortions in economic competition and lack of meaningful reciprocity in the bilateral trade relationship. The U.S. has also looked at bilateral and multilateral approaches to address the problems it perceives China has created and is creating with the functioning of the global trading system.

Bilaterally, the U.S. has conducted its 301 investigation on a host of longstanding concerns of the U.S. business community on Chinese policies and practices. The adverse findings from the USTR investigation has led to the U.S. imposing additional tariffs on Chinese goods when resolution of the underlying issues was not achieved followed by retaliation by China and a series of additional rounds of more tariffs and more retaliation. The U.S. and China did engage in negotiations to see if they could resolve the underlying concerns of the United States. A phase 1 agreement was signed in January 2020, with a phase 2 process supposed to have commenced by May.

At the same time, the United States has pursued reform at the WTO (1) to address longstanding and bipartisan concerns with the WTO dispute settlement system, (2) to address rule changes to address some of the distortions that flow from China’s nonmarket economy, (3) to modify the self-selection nature of which Members are “developing” and (4) to improve transparency.

On transparency, many countries are not current on the various notification requirements, but major concerns have existed with China and India in terms of the number and dollar value of subsidy programs that are not being reported in their notifications to the WTO.

Some of the reforms of interest to the United States are being pursued as well by others, such as the EU and Japan on state-invested companies and industrial subsidies and various other countries on transparency.

But the WTO has been struggling to achieve forward movement on many issues of importance to different Members in part due to lack of consensus on issues and a lack of leadership/coordination among major players.

COVID-19 Complicates the Bilateral Relationship

The COVID-19 pandemic has complicated the situation for the WTO and for U.S.-China relations both because of the global reach of the health problem resulting in reduced functionality of the Missions in Geneva and the current inability to hold face-to-face meetings and the widespread use of export restraints on medical goods (including personal protection equipment like masks, gloves, shields, gowns, etc.) as demand in nations with significant number of infections has grossly exceeded existing inventories and production capabilities both in country and globally.

In terms of U.S.-China relations, the lack of complete transparency by the Chinese in the early months of the COVID-19 outbreak, some slowness of action by the World Health Organization, and both missteps on testing and slowness of initial action within the United States (and resulting massive unemployment, costs to the economy and multiple trillion dollar government response) has added finger pointing on the pandemic to the already tense bilateral relations. It has also resulted in the U.S. distrusting the WHO and temporarily suspending U.S. funding for the organization.

With the collapse in global trade, the pandemic has also made it far less likely that China will honor its increased import commitments from the U.S. in 2020 as contained in the Phase 1 Agreement. See 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/. That said, the U.S. continues to identify important advances being made at least in agriculture with China. See https://ustr.gov/about-us/policy-offices/press-office/press-releases/2020/may/usda-and-ustr-announce-continued-progress-implementation-us-china-phase-one-agreement.

On trade, the pandemic has crippled the economies of many countries with the resulting declines in imports and exports in the March-April time frame and likely going forward for some period, though China as the first country through the outbreak and a major producer of medical goods actually saw increased overall exports to the world in April.

United States Strategic Approach to The People’s Republic of China

Earlier this week, the White House forwarded to Congress a document required by the 2019 National Defense Authorization Act, United States Strategic Approach to The People’s Republic of China. On the trade/economic front, the paper repeats the concerns that the Administration has laid out in other documents most of which are summarized above (not including the COVID-19 issues). The U.S. views challenges from China to three broad areas — (1) economic challenges (largely failure to continue reforms to become a market economy, failure to honor commitments made to the US, use of predatory practices, insistence on being a developing country, etc.); (2) challenges to U.S. values; and (3) security challenges. The link to the document is here and the text is embedded below. https://www.whitehouse.gov/wp-content/uploads/2020/05/U.S.-Strategic-Approach-to-The-Peoples-Republic-of-China-Report-5.20.20.pdf.

U.S.-Strategic-Approach-to-The-Peoples-Republic-of-China-Report-5.20.20

Challenges for the WTO

The WTO remains able to move forward where issues are limited to a subset (the “willing”) as progress on e-commerce talks would support. But in a consensus based system, distrust between major players will paralyze large parts of any agenda. Indeed, with the large number of WTO Members (164) at various stages of economic development, there will almost always be a wide divergence of views on any issue. In such a situation, leadership and cooperation among major economies become important to develop a consensus. So it is hard to see how the WTO advances a reform agenda without improved relations between the organization’s two largest Members.

With the recently added challenge for the WTO of selecting a new Director-General, the sour relationship the U.S. and China will likely make finding a candidate who would be supported by a consensus of the Membership that much harder, suggesting at a minimum a process that takes the full six-month time for selection (versus any hoped for expeditious resolution in light of DG Azevedo’s departure at the end of August) and perhaps extended time lines. If the selection process breaks down into highly polarized camps (the existing procedures were developed to try to prevent such an outcome), the ability to move forward the WTO’s reform and existing negotiating agenda will be delayed by certainly months and perhaps longer.

Conclusion

At a time when the world is struggling with a global pandemic which continues to cause huge health challenges to many countries in the world and has devastated the global economy at least temporarily, costing tens of millions of workers jobs, and likely closing hundreds of thousand of businesses around the world while requiring government financial support that will likely exceed ten trillion dollars, there is an unfortunate lack of global cooperation between the major economic players and distrust at least from the U.S. of multilateral institutions viewed as either ineffective to deal with China’s economic system or not operating in an unbiased manner.

A major part of the challenge flows from the distrust that exists between the world’s two largest economies that precedes the pandemic but that has been worsened by the pandemic’s development and handling. The two countries have different economic systems which are essentially non-compatible, have different political systems and different ideologies and view each other as competitors and potential adversaries.

In a change of approach, the United States has decided to take a more aggressive approach to achieve reciprocity in fact with China and not merely on paper or from spoken promises. The change in approach has resulted in the U.S. acting unilaterally in certain situations. China has appeared unable to understand or agree with the concerns raised by the U.S. (and others) and harbors a belief that the real motive behind U.S. actions is “to keep China down”. This mutual distrust has resulted in both hard feelings and an inability to achieve cooperation on a large number of trade, economic and other issues.

The current U.S.-China relationship increases the problems for many multilateral organizations, but certainly for the WTO both in terms of selecting a new Director-General and in developing WTO reforms and moving ongoing negotiations forward.

Look for a challenging second half of 2020.

U.S.-China Phase I Agreement — Some Progress on Structural Changes; Far Behind on Trade in Goods and Services

In prior posts, I reviewed the U.S.-China Phase I Agreement and the commitments made by the parties. See https://currentthoughtsontrade.com/2020/01/19/u-s-china-phase-1-agreement-details-on-the-expanding-trade-chapter/; https://currentthoughtsontrade.com/2020/01/15/u-s-china-phase-1-trade-agreement-signed-on-january-15-an-impressive-agreement-if-enforced/. While for many the promised start of a Phase II was viewed as the more important in light of the issues not reached in the partial deal that was struck in January, the COVID-19 pandemic has absorbed much of the global energy for both countries, and no new talks have started.

Moreover, with both countries exchanging charges against the other in terms of the origin of the virus causing the pandemic and more recently concerns about transparency on the virus in China, there have been heightened tensions between the two countries. with some comments in the press calling for an end of the agreement by each country.

A recent telephone call between U.S. Treasury Secretary Mnuchin, USTR Ambassador Lighthizer and China’s Vice Premier Liu He seemed aimed at keeping the Phase I Agreement moving forward. The US press release on the call is reproduced below.

“USTR and Treasury Statement on Call With China

“05/07/2020

“Vice Premier Liu He, U.S. Treasury Secretary Steven T. Mnuchin, and Ambassador Robert Lighthizer participated in a conference call today. They discussed economic and trade issues, including the recently concluded Phase One agreement. The parties shared updates on COVID-19 and their assessments of its effects on economic growth as well as the measures their countries are taking to provide support to their economies.

“The parties discussed the ongoing process of implementing the Phase One agreement between the two countries that went into effect February 14. Both sides agreed that good progress is being made on creating the governmental infrastructures necessary to make the agreement a success. They also agreed that in spite of the current global health emergency, both countries fully expect to meet their obligations under the agreement in a timely manner. Meetings required by the agreement have been conducted via conference call and will continue on a regular basis.”

https://ustr.gov/about-us/policy-offices/press-office/press-releases/2020/may/ustr-and-treasury-statement-call-china.

Indeed, notices on Chinese Ministry websites as well as statements from U.S. government officials have made clear that China has been making progress on a number of the changes to laws and regulations where commitments were undertaken in the Phase I Agreement. For example on the large number of agricultural program changes that China agreed to make, USDA and USTR released a joint statement in late February, shortly after the Agreement took effect, reviewing the progress being made. See https://ustr.gov/about-us/policy-offices/press-office/press-releases/2020/february/usda-and-ustr-announce-progress-implementation-us-china-phase-one-agreement.

USDA-and-USTR-Announce-Progress-on-Implementation-of-U.S.-China-Phase-One-Agreement-_-United-States-Trade-Representative

Similarly, the United States has taken steps to address obligations that it undertook in the Agreement such as authorizing the importation of citrus products from China. See 85 FR 20975-20983 (April 15, 2020; https://www.aphis.usda.gov/aphis/newsroom/stakeholder-info/sa_by_date/sa-2020/sa-04/china-citrus.

“APHIS Authorizes Importation of Fresh Citrus Fruit from China

“Last Modified: Apr 14, 2020 Print

“The U.S. Department of Agriculture’s Animal and Plant Health Inspection Service (APHIS) is authorizing the importation of five types of commercially produced fresh citrus fruit from China into the continental United States. After thorough analysis, APHIS scientists determined that pummelo, Nanfeng honey mandarin, ponkan, sweet orange, and Satsuma mandarin fruit from China can be safely imported into the United States under a systems approach to protect against the introduction of plant pests. 

“A systems approach is a series of measures taken by growers, packers, and shippers that, in combination, minimize pest risks prior to importation into the United States. In this case, the systems approach includes importation in commercial consignments only, registration of places of production and packinghouses, certification that the fruit is free of quarantine pests, trapping program for fruit flies, periodic inspections of places of production, grove sanitation, and postharvest disinfection and treatment. This completes agreements on another Chinese commodity listed in Annex 11: Plant Health of the Economic and Trade Agreement between the United States of America and The People’s Republic of China, Phase One.

“This notice of authorization will go into effect on the date of publication in the Federal Register, April 15, 2020. The docket with information about this decision is available here upon publication on April 15, 2020: http://www.regulations.gov/#!docketDetail;D=APHIS-2014-0005.”

Expanding Trade -Growing Exports to China from the U.S. by $76.7 Billion in 2020

One of the important parts of the Phase I Agreement was the chapter on Expanding Trade and the commitments by China to increase imports from the United States by some $200 billion over 2020 and 2021 above the 2017 figures (i.e., U.S. exports to China ahead of the additional tariffs imposed by the U.S. and then China against goods from each other). The figures for 2020 were for increases of $76.7 billion, $64.9 billion in certain goods and $12.8 billion in certain service sectors.

The challenges to the Chinese economy in the first quarter because of COVID-19 and to the United States (and many other countries) for part of the 1st quarter and at least the second quarter of 2020 because of the pandemic makes the large increase in purchases seem unlikely. Certainly, first quarter figures for U.S. domestic goods exports paint a picture suggesting 2020 will not meet objectives. The goods categories that were included in Annex 6.1 and the Attachment thereto of the Phase I Agreement accounted for 59.1% of U.S. domestic exports to China in 2017 (the base year)– $70.9 billion of $119.9 billion total U.S. domestic exports to China. In the first quarter of 2020, the goods categories covered by the Annex showed U.S. domestic exports of $12.7 billion which would leave $122.1 billion to be exported in the last nine months of 2020 ($13.57 billion/month or greater each month than the U.S. exported in the first quarter of the year).

The remaining $49 billion of U.S. domestic exports don’t have particular export targets, but are running well below 2017 levels and indeed are more than 21% lower than the first quarter 2019 levels, suggesting 2020 levels of just $28.29 billion.

The table below shows the US exports for 2017-March 2020 and the objective for 2020 included in Annex 6.1. All figures are in $ Billions.

Product2017201820191st Qtr.
2019
1st Qtr.
2020
Manufactured goods
1. industrial machinery$10.949$12.288$11.062$2.318$2.500
2. electrical equip. &
machinery
$4.311$4.586$4.283$1.008$1.078
3. pharmaceutical
products
$2.089$2.126$2.362$0.483$0.665
4. aircraft* $0$0$0$0$0
5. vehicles$10.093$6.487$7.050$1.888$1.049
6. optical and medical
instruments
$3.135$3.398$3.527$0.763$$0.806
7. iron and steel$1.176$0.652$0.285$0.075$0.069
8. other manufactured
goods
$10.702$11.168$11.914$3.167$3.021
Total MFG goods$42.456$40.705$40.484$9.702$9.188
Agriculture
9. oilseeds$12.225$3.119$7.989$1.696$1.028
10. meat$0.559$0.440$1.193$0.110$0.727
11. cereals$1.358$0.696$0.313$0.015$0.119
12. cotton$0.973$0.921$0.707$0.197$0.290
13. other agricultural
commodities
$4.504$4.121$3.680$0.765$0.768
14. seafood$1.234$1.055$0.822$0.200$0.132
Total Agriculture$20.852$10.353$14.704$2.983$3.063
Energy
15. liquefied natural
gas
$0.424$0.464$0.063$0.036$0.059
15. crude oil$4.304$5.374$2.478$0.405$0.182
17. refined products$2.444$1.781$0.469$0.185$0.141
18. coal$0.403$0.311$0.127$0.047$0.048
Total Energy$7.575$7.930$3.138$0.674$0.429
Total Phase I Goods HS$70.882$58.987$58.326$13.360$12.680
Other domestic exports$49.028$50.593$36.005$9.435$6.798
Total domestic exports
to China
$119.911$109.580$94.331$22.795$19.478

Annex 6.1 has manufactured goods increasing $32.9 billion above 2017 levels for a total of $75.356 billion for 2020; leaving $66.168 billion for the last nine months of the year or $7,352 billion/month for the last three quarters.

Similarly, Annex 6.1 has agriculture imports by China from the U.S. increasing $12.5 billion over 2017 levels to $33.354 billion for 2020 which would leave $31.015 billion for the last nine months of 2020 ($3.446 billion/month).

Finally, Annex 6.1 shows energy increasing by $18.5 billion in 2020 over 2017 levels. That means 2020 has a target of $26.075 billion with $25.646 billion needing to be exported over the last nine months ($2.86 billion/month).

With the ongoing pandemic and Chinese industry operating below full capacity and U.S. industry and agriculture still coping with the market problems in the U.S. from efforts to cope with COVID-19, it is hard to see the goods commitments being met in 2020.

The challenges for the US service sector in exports to China are equally daunting. Total U.S. exports of services to China in 2017 were $56.009 billion of which $55.458 billion are in categories covered by Annex 6.1. Specifically, category 19, charges for use of intellectual property were $7.591 billion in 2017 for U.S. services exports to China. Business travel and tourism (category 20) showed U.S. exports to China of $32.705 billion in 2017. Financial services and insurance (category 21) had exports to China of $4.208 billion in 2017, while other services (category 22) showed exports of $10.030 billion to China. Finally, cloud and related services had exports to China in 2017 of $0.924 billion.

U.S. services export data for 2020 doesn’t show the breakdown by category by country. However, China has a much larger percent of U.S. services exports in the travel and tourism category (about 25% for all countries vs. 58.4% for China). U.S. data for the first quarter of 2020 show exports of travel and tourism services to the world down 19.5% with March being down more than 50%.

With the travel limitations in place in the U.S. and that have been in place in China and with the slow ability of the U.S. to reopen much of the travel and tourism related sectors (transportation, hotels, restaurants, entertainment venues, etc.), there seems to be no realistic scenario by which US service exports to China grow $12.5 billion in 2020.

Conclusion

The U.S.-China Phase I Agreement was an important step in trying to find a path forward for normalized trade relations between the world’s two largest economies. The path requires the start of a Phase 2 but importantly needs the building of confidence between the two countries based on achieving results in implementing the Phase I Agreement.

There have been extraordinary events clouding the global community as nations struggle to address the COVID-19 pandemic. Those events have complicated the ability of the U.S. and China to achieve in 2020 what the Phase I Agreement contemplates, at least in terms of expanded trade. That said, both China and the U.S. have implemented certain provisions of the Agreement, and there has been a recognition by the U.S. Administration of efforts by China to comply with modifications to laws, regulations, etc. agreed to in the Phase I Agreement.

The first two months that the Agreement has been in place have not resulted in significant movement on implementing the important chapter of expanding trade. For the United States, struggling to right its economy amidst the pandemic, a strong effort by China to honor its commitments to expand trade significantly in 2020, would be a welcome development and hopefully lead to the reengagement by the two countries to start and complete a phase 2 Agreement.