expanding trade

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

· January 19, 2020 · Uncategorized · , , , , , , , , · No Comments

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.

U.S.-China Phase 1 Agreement — What to Look for When the Agreement is Released on January 15, 2020 after the signing

· January 6, 2020 · Uncategorized · , , , , , , · No Comments

The U.S. Administration has indicated that the Phase One trade deal with China is “historic and enforceable”. President Trump tweeted on New Year’s Eve that the agreement would be signed by him and the Chinese at the White House on January 15. The Chinese have reportedly modified their travel schedule to accommodate the President’s desired signing date although the Chinese delegation will be headed by Vice-Premier Liu He, not President Xi Jinping. See South China Morning Post, 5 January, 2020, Trade war: China to travel to US on January 13 to sign phase one deal.

According to a fact sheet released by USTR on December 13, 2019, the Phase One agreement has at least seven chapters dealing with (1) intellectual property, (2) technology transfer, (3) agriculture, (4) financial services, (5) currency, (6) expanding trade and (7) dispute resolution. The fact sheet is attached below.

Dec.-13-2019-Fact-Sheet-from-USTR-on-Agreement-between-US-and-PRC

The agreement between the U.S. and China is reportedly 86 pages in length. This compares to the draft agreement that was being circulated in mid-2019 that was 150 pages before major revisions were made by China reducing the text to 105 pages and which led to increased tariffs being imposed by the United States and additional retaliation by China. Important issues remain for phase two including cybersecurity issues, China 2025 related issues on state owned or invested enterprises, state subsidization and other matters.

I. Chapters on Intellectual Property, Technology Transfer, Agriculture, Financial Services and Currency

Because the first five topics have been the subject of bilateral discussions and dispute settlement between the countries for years, the value of the chapters will depend both on the specificity of the obligations identified, the extent to which such obligations go to the provinces and local governments as well as the central government of China and, most importantly the nature and automaticity of the dispute settlement provisions that apply to the obligations undertaken. As reviewed in many USTR reports, China has a long history of making commitments in these areas which have not been implemented or only partially implemented. See, e.g., USTR, 2019 National Trade Estimate Report on Foreign Trade Barriers, pages 97-117, [“2019 NTE Report], https://ustr.gov/sites/default/files/2019_National_Trade_Estimate_Report.pdf.

II. Chapter on Expanding Trade

The expanding trade chapter as the Fact Sheet indicates “includes commitments from China to import various U.S. goods and services over the next two years in a total amount that exceeds China’s annual level of imports for those goods and services in 2017 by no less than $200 billion.” USTR’s 2019 NTE Report indicated that U.S. exports of goods to China were $129.9 billion in 2017 and the U.S. exports of services were $57.6 billion in 2017. Thus, the agreement apparently calls for US exports of goods and services in 2020 and 2021 of at least $387.5 billion/year vs. $187.5 billion in 2017, a level more than twice the 2017 actual levels. The fact sheet suggests that commitments are product specific in terms of increased purchases. Industries will be looking carefully at what is included in this chapter on products or services of interest, seeing whether China waives any retaliatory tariffs on particular products during 2020 and 2021, and evaluating early signs of improved market access. Presumably the Administration and Congress will be monitoring on a monthly basis how commitments are being implemented in both goods and services.

Considering the large decline in U.S. exports of goods to China during the first 10 months of 2019 ($16.1 billion or 17.17%) and for some products in 2018 vs. 2017 or 2016, one may expect “commitments” in a variety of products where a return to 2017 levels or significant increases would appear to be manageable. See e.g,. HS 8800, civil aircraft (2019 10 month decline of $5.3 billion in U.S. domestic exports); HS 1201, soybeans (decline 2016-2018 of $11.1 billion); HS 8701, motor vehicles for transporting people (decline 2017-2018 of $3.7 billion); HS 2709 petroleum oils from crude (2019 10 month decline of $2.7 billion); HS 2707, petroleum gases and other gaseous hydrocarbons (2019 10 month decline of $1.3 billion); HS 8708 parts of tractors and motor vehicles (2019 10 month decline of $813 million); HS 7404, copper waste and scrap (2019 10 month decline of $633 million); HS 4407. wood sawn or chipped more than 6 mm thick (2019 10 month decline of $612 million) ; HS 4403, wood in the rough (2019 10 month decline of $504 million); HS 1007, grain sorghum (2019 10 month decline of $403 million).

Other factors, such as existing or available expanded capacity, needs for worker expansion vs. greater utilization of existing workforce, competitiveness of U.S. products, diversion from third countries or from the U.S., will obviously all have some potential effect on whether commitments can be achieved at a micro level if purchase orders are placed.

For services, it is assumed that significant increases to China are possible with liberalized markets in China.

III. Dispute Resolution

The chapter of Dispute Resolution appears to contain consultation processes at “both the principal level and the working level” and procedures for handling disputes with provisions that “allow each party to take proportionate responsive actions” that a party views as appropriate. This chapter is important both for the specifics and timing of the consultation process and the specifics of how disputes will be handled, the timing of such disputes and any parameters on “responsive actions”. At the end of the day, an agreement with China that is not enforceable will lead back to increased tensions in the near future.

IV. Conclusion

The Phase I agreement has the potential to be an important step in the U.S. efforts to establish a more sustainable trade relationship with China. The Administration deserves credit for aggressively pursuing a reset. Breaking the negotiations into phases carries risks as the more difficult issues remain on the table and are very important in terms of long-term viability of the bilateral trade relationship. Not finding solutions in a single agreement will be viewed by many as weakening the chances for achieving a breakthrough on these critical issues that are left for phase 2.

At the same time, the chapter on “Expanding Trade” is highly unorthodox in terms of its (at least temporarily) invoking managed trade to address the hundreds of barriers that have haunted the ability of the U.S. and others to have market-based results in trade with China. Because several decades of efforts to get China to actually operate on market principles have been unsuccessful and because the WTO rules do not address many of China’s economic system distortions, the chapter and underlying commitments that have been made are an experiment is finding a way forward for economic systems that don’t rationally coexist where there are major countries employing each economic system. The next two years will show whether the experiment provides a possible approach to the coexistence of such different systems in a global economy where companies are already operating in both systems.