energy

U.S.-China Phase 1 Agreement – Details on the Expanding Trade Chapter

The retaliation that China has pursued against U.S. exports in response to the U.S. 301 investigation and resulting U.S. actions reduced total US domestic exports of goods by some $10 billion between 2017 and 2018 and a further $15 billion in the first eleven months of 2019.

While the U.S.-China Phase 1 Agreement does not include obligations for China to reduce retaliatory tariffs on U.S. exports, the Chapter 6 Expanding Trade obligations that China has assumed would not be plausible if China doesn’t unilaterally reduce retaliatory tariffs on many products. It has done that on some products in 2019 and it is assumed when the agreement takes effect in mid-February 2020 a significant number of retaliatory tariffs will be reduced at least temporarily to permit China to honor its purchase commitments.

The U.S. and China agreed to different levels of ambition in terms of increased U.S. exports depending on four broad categories of goods and services – manufactured goods, agriculture, energy and services. What isn’t immediately apparent is that the increases in goods exports does not cover all U.S. export categories but rather refers to levels of ambition for the categories shown in Annex I and detailed in the Attachment to Annex 6-1 of the Agreement (pages 6-4 to 6-23).

But in fact, manufactured goods (8 subcategories), agriculture (6 subcategories) and energy (4 subcategories) account for less than 60% of all U.S. domestic exports of goods to China in 2017 (59.17%). This suggests both larger percentage increases for the products that are covered to achieve the growth in goods exports and an unknown future for the 40.83% of export products not included in the Attachment, products which saw sharp declines in the first eleven months of 2019 of over $12 billion (a decline of 28.12% from the comparable period in 2018). While the service categories covered in the Attachment are also not inclusive of all service sectors, the select categories account for 98.97% of all service exports to China reflected in U.S. statistics for 2017.

Thus, the level of stretch in achieving the very ambitious figures in Annex 1 depends on a number of factors, including whether one compares increases to the products and services identified versus total goods and services and how one factors in U.S. exports of goods and service not covered by specific commitments.

For example, in 2017 total US domestic exports and U.S. service exports were $175.9 billion. From page 6-3 of the US-China Phase 1 Agreement, the total commitments for increased purchases by China over 2017 levels are $76.7 billion in the first year (Feb. 14, 2020-Feb. 13 2021) and $123.3 billion in the second year (Feb. 14, 2021 – Feb. 13, 2022). The level of increases versus 2017 total exports of goods and services would be 43.6% and 70.0%.

However, only $126.9 billion of goods and services are included in the Attachment to Annex 6-1. If the increases presented are against those smaller numbers, the level of increase needed is obviously greater — 60.4% and 97.2%.

And there doesn’t appear to be any level of trade projected for the $49 billion of goods exports and $600 million services exports not included in the Attachment to Annex 6-1. Since many of the goods exports are subject to retaliatory tariffs, there is not likely to be a rebound in exports from the U.S. to China of these non-specified goods in the near term suggesting that the experience in 2019 (data through November) is likely the best scenario for those products. If so, total U.S. goods exports would be $12 billion lower (services not covered are minor and unlikely to be negatively affected). Increases over 2017 actual (adjusted for the decline for non-covered goods in 2019) would represent an increase of 40.02% in the first year and 68.62% in year two.

Below is a review of the four categories to see the level of ambition being undertaken in each.

Manufactured goods

The manufactured goods listed in the Attachment to Annex 6-1 are broken into the following eight subcategories: industrial machinery, electrical equipment and machinery, pharmaceutical products, aircraft (orders and deliveries), vehicles, optical and medical equipment, iron ad steel, and other manufactured goods. The HS categories listed show total U.S. domestic exports to China in 2017 of $42.521 billion (and most non-covered US exports of goods would be in this grouping). The level of increase in exports of manufactured goods is $32.9 billion in year one and $44.8 billion in year two – increases over actual 2017 of 77.37% and 105.36% respectively.

Agriculture

The agriculture category in Annex 6-1 has six subcategories: oilseeds, meats, cereals, cotton, other agricultural commodities, and seafood. The 2017 U.S. domestic exports for the HS categories included under agriculture in the Attachment to Annex 6-1 were $20.851 billion. Annex 6-1 calls for increased U.S. exports of $12.5 billion in year one and $19.5 billion in year two, increases of 59.95% and 93.52% respectively.

Energy

The energy group products is broken into four subcategories: liquefied natural gas, crude oil, refined products and coal. The increased exports are the largest percentage wise for this category as 2017 exports are relatively modest, just $7.57 billion. With growth of $18.5 billion in year one and $33.9 billion in year two, the rate of increase needs to be 244.23% in year one and 447.53% in year two over actual 2017 levels. Presumably the aggressive increases reflect China’s energy needs and the developments in the U.S. energy sector in recent years.

Data on each of the goods categories is contained in the table below. For simplicity, year 1 is referred to as 2020 and year 2 as 2021.

Services

Data on U.S. trade in services with China show growing U.S. exports from 2016 to 2017 and continuing to grow in 2018. Data for 2017 show U.S. exports to China of $56.009 billion growing to $57.140 billion in 2018.

The service sectors covered in Annex 6-1 include charges for use of intellectual property, business travel and tourism, financial services and insurance, other services, and cloud and related services. These categories in 2017 accounted for $55.434 billion with one of the BEA categories not showing exports to China to preserve confidentiality. The growth objectives included in Annex 6-1 are for $12.8 billion additional US exports in year one and $25.1 billion in year two representing growth rates over 2017 action of 22.85% and 44.81% respectively. U.S. data are presented below.

As reviewed in the post on January 15, there are significant commitments by China in a number of the chapters which should make a significant expansion of exports from the U.S. doable in the short run. Such a result is envisioned in Chapter 6 of the Phase 1 Agreement with specific commitments on Chinese purchases broken down by categories and possibly by subcategories. Such commitments will require a reduction or elimination of retaliatory tariff on many products to permit results in the first two years of the agreement.

While a lot of attention understandably is focused on what remains to be done with China on a host of critical issues (industrial subsidies, SOEs, China 2025 policies, etc.), a strong growth in demand from China for U.S. products and services is important if achieved. Let’s hope that the Agreement surprises many by its early and complete implementation.