With first phase in the books, U.S.-China trade talks shift to next stage

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The escalation in U.S.-China trade relations appeared to take a brief pause Wednesday when U.S. President Donald Trump and Chinese Vice Premier Liu He signed what has been billed as a “Phase One” trade agreement between the world’s two largest economies.

“Today we take a momentous step, one that has never been taken before with China, toward a future of fair and reciprocal trade as we sign Phase One of the historic trade deal between the United States and China,” Trump said in opening remarks during the signing ceremony Wednesday, adding the deal would begin to “right the wrongs of the past.”

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Over the past two years, following the launch of a Section 301 investigation in August 2017, the U.S. has imposed a total of approximately $370 billion in tariffs on Chinese goods, with China responding with tariffs of its own at each step of the way amounting to $110 billion.

A pause on new tariffs, plus increased purchases of U.S. goods

The recent agreement, agreed to in principle late last year, will see to an increase in China’s purchases of U.S. agricultural goods, manufactured goods, energy goods and services.

From the U.S. side, it cut in half a 15% tariff placed on $120 billion in Chinese goods as of Sept. 1, 2019, while the $25% on $250 billion in goods will remain in place. A planned imposition of tariffs on $160 billion in Chinese goods, including toys and cellphones, will no longer be carried out.

The U.S. imported approximately $539.7 billion in Chinese goods in 2018, according to the U.S. Census Bureau.

“We’re leaving tariffs on … but I will agree to take those tariffs if we are able to do Phase Two,” Trump said Wednesday.

The deal comes after the U.S. Treasury Department on Monday announced it no longer listed China as a currency manipulator (after designating it as such in August 2019).

“During the two-year period from January 1, 2020 through December 31, 2021, China shall ensure that purchases and imports into China from the United States of the manufactured goods, agricultural goods, energy products, and services identified in Annex 6.1 exceed the corresponding 2017 baseline amount by no less than $200 billion,” Article 6.2 of the agreement text states.

In the case of manufactured goods, the agreement calls for “no less than $32.9 billion above the corresponding 2017 baseline amount is purchased and imported into China from the United States in calendar year 2020, and no less than $44.8 billion above the corresponding 2017 baseline amount is purchased and imported into China from the United States in calendar year 2021.”

Meanwhile, for agricultural goods, “no less than $12.5 billion above the corresponding 2017 baseline amount is purchased and imported into China from the United States in calendar year 2020, and no less than $19.5 billion above the corresponding 2017 baseline amount is purchased and imported into China from the United States in calendar year 2021.”

In 2017, U.S. agricultural exports to China totaled $23.8 billion, accounting for over 17% of total U.S. agricultural exports, according to the Minnesota Department of Agriculture. China was the top export market for U.S. agricultural goods, with soybeans being the most-imported product by China (at 52% of market share).

In 2011, China surpassed Canada as the U.S.’s top agricultural export market. In 2013, U.S. agricultural exports to China reached a high of $29.4 billion.

The agreement text states the increases in Chinese purchases of U.S. goods are projected to continue from 2022-2025.

“The Parties project that the trajectory of increases in the amounts of manufactured goods, agricultural goods, energy products, and services purchased and imported into China from the United States will continue in calendar years 2022 through 2025,” the agreement states.

It remains to be seen if the projected increased contained in this latest agreement will in fact materialize, particularly in the face of slowing economic growth in China.

In fact, varying numbers were voiced during the course of Wednesday’s signing ceremony, held in the White House’s East Room and broadcast on Bloomberg TV.

Trump indicated China would purchase up to $50 billion in U.S. agricultural goods. However, Liu later said China would purchase $40 billion in U.S. agricultural goods, with the possibility of importing more.

One factcheck from The Annenberg Public Policy Center in October cites Chad E. Hart, an associate professor of economics and crop markets specialist at Iowa State University, who noted China’s Africa Swine Fever crisis could tamp down soybean purchases:

Hart, the Iowa State University professor, said that “it’s hard to imagine that you can suddenly double the amount of imports going into there with its economy slowing down.” Hart said the biggest commodity that China imports from the U.S. is soybeans, which are used to feed livestock, particularly pigs. But African Swine Fever is “endemic across China,” as the USDA put it, so Hart questions China’s need to import more soybeans.

The agreement also includes chapters on intellectual property, technology transfer and financial services.

“For decades, American farmers, ranchers, manufacturers and innovators have been hurt by the unfair trade with China,” Trump said. “Forced technology transfer and intellectual property theft have been huge problems.”

It remains to be seen how violations of the provisions in these sections will be dealt with going forward — that is, if they will in fact be followed. As indicated by Trump, however, the U.S. still has existing tariffs, in addition to additional room for new tariffs, to deploy if these chapters prove unsuccessful in producing compliance on these issues.

Reactions to ‘Phase One’; WTO implications

Markets reacted positively to Wednesday’s signing; the Dow Jones Industrial Average soared to a record high, rising above 29,000.

As for metals markets, Lauren Wilk, the Aluminum Association’s vice president for policy, lauded the deal but cautioned more work needs to be done.

“We congratulate President Trump and his administration on this important first step toward a more balanced trading relationship between the U.S. and China,” Wilk said in a statement released Wednesday. “As the parties move to the next phase of negotiations, we strongly urge negotiators to focus on addressing the unfairly subsidized overcapacity that is hurting U.S. aluminum producers – and impacting the global aluminum market.”

Wilk continued, putting the spotlight on Chinese subsidies.

“We were encouraged by the recent announcement by the U.S., European and Japanese governments pursuing strengthened World Trade Organization (WTO) rules addressing industrial subsidies,” Wilk said. “The Trump administration has a tremendous opportunity to support more than 160,000 American aluminum workers by pursuing bilateral and multilateral agreements to rein in unfair activity in China.”

It remains to be seen how the WTO figures into all of this, particularly given the existential crisis its dispute settlement body faces.

The global trade body has routinely come in for criticism from Trump and the WTO’s dispute settlement body is paralyzed, as the U.S. has blocked the appointment of new judges. A minimum of three judges must be in place to make decisions. However, with the terms of two judges expiring Dec. 10, the Appellate Body has since been left with just one judge, leaving countries to appeal “into the void.”

The agreement text does refer to the WTO on numerous occasions.

In Chapter 3, on Trade in Food and Agricultural Products, the “parties acknowledge the importance of each Party adhering to its World Trade Organization (WTO) commitments with respect to the provision of domestic support.”

Annex 1 of Chapter 3 also states, “The Parties intend to engage each other cooperatively on agriculture-related technical, and sanitary and phytosanitary, measures, including on the subject of risk communication. The Parties intend to engage each other cooperatively on these subjects including by increasing cooperation on them in international organizations, such as the WTO, Asia-Pacific Economic Cooperation, the United Nations Food and Agriculture Organization (FAO), and the Codex Alimentarius Commission (Codex). ”

U.S. Rep. Kevin Brady (R-TX), the top Republican on the House Ways and Means Committee, also praised the agreement.

“Most importantly, for the first time China and America have agreed to fully enforce these commitments with specific timetables and accountability if these commitments are not kept,” Brady said in a statement Wednesday. “We recognize that other priorities remain to be address in Phase Two discussions, but there is no question this is a breakthrough agreement.”

Meanwhile, U.S. Rep. Richard Neal (D-MA), chairman of the House Ways and Means Committee, offered a more critical take of the agreement.

“For two years, I have encouraged the Administration to aim high in negotiations with China, urging them not to give in to the temptation to settle for superficial wins,” Neal said. “I have reinforced the importance of holding for China to commit to structural changes that will make a real difference to American workers and companies seeking to compete and trade with those in China. At the start of last year, I invited Ambassador Lighthizer to testify at the Committee’s first hearing on trade in the 116th Congress and offered my partnership to the Administration on securing a good deal – a structural deal – with China.

“Despite today’s elaborate ceremony, the jury is still out on how ‘historic’ this deal is. In calling it a ‘Phase One’ deal, the Administration admits that there are other important commitments they have not yet been able to secure, especially disciplines on China’s use of unfair subsidies.”

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The U.S. Chamber of Commerce also praised the deal while signaling more work is needed in a future second phase.

“We commend both governments for staying the course and taking this important step to rebuild trust and restore some stability in the world’s most important commercial relationship,” U.S. Chamber of Commerce CEO Thomas J. Donohue said. “This deal provides much needed certainty to American businesses as they begin the new year.”

The Chamber of Commerce called for the beginning of Phase Two talks “as soon as possible.”

“These complex and long-standing issues in the U.S.-China commercial relationship have a significant impact on American businesses’ ability to compete in the global economy,” Donohue said. “We know there is challenging work ahead, and the Chamber stands ready to support both governments as they embark on the next phase of this important deal.”

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