The anatomy of phase-one US-China trade deal

Ultimate challenge is to turn agreement into action and results

ISLAMABAD: With the finalisation of phase-one deal, the truce in the trade war between the United States and China seems to be over.

While architects of the deal hailed it as a great diplomatic success of the decade, now the ultimate challenge at hand is to turn all that has been said into action and results.

China has committed to farm product purchases of at least $40 billion annually over the next two years, which is a very ambitious target. Beijing will introduce tariff-free quotas for import of US agricultural goods by state-owned companies but it remains unclear which US agri-products will get the much-needed boost.

China’s National Development and Reform Committee has issued new quotas worth a million tonnes to several crushers.

In 2018, China’s soybean imports from the US dropped drastically – almost to half of 2017 levels. Meanwhile, soybean imports from Brazil rose 40% at the expense of US farmers.

But then the 2019 African swine fever in China changed the very dynamics of US-China agri-trade war. China is importing twice the amount of meat products than it was in 2017. It has ended a ban on Canadian meat products and inked deals with top European meat processors.

So, in 2020, meat imports alone could easily top $20 billion but again the challenge for the US is to grab at least $5 billion worth of Chinese business.

In 2020, soybean imports from the US could be as high as $19 billion but that means Chinese imports need to tilt in favour of Washington in order to get American oilseed exports back to pre-trade war levels.

At present, it is hard for the US to compete with Brazil unless Beijing offers significant trade concessions to Washington.

China also has a huge demand for chicken paws and many years back, the US used to export 400,000 tonnes of that every year. These billions of American chicken paws are worthless in the US but not in China.

In 2009, Beijing slapped tariff on the US-origin chicken feet in order to protect its local producers and the trade dispute was referred to the World Trade Organisation (WTO).

Though chicken feet exports to China fell, exports to Hong Kong surged at the same time and very often, those goods would be smuggled into the mainland China. If in 2020, chicken feet trade gets green signal from both countries, it would mean at least another $1 billion worth of trade between the two sides.

There is also a natural demand for American nuts and animal feed in China that could add another $3 billion to the trade total.

However, the question remains: what’s the bottom line for Beijing in this trade deal?

Beijing believes that the trade war has taken its toll on the country’s GDP growth as investor confidence has been shaken and corporations like Samsung are looking to pull out their manufacturing operations from China.

So Beijing’s strategic blueprint seems to have two basic components – normalise trade relations with the US in order to remain a global business hotspot and secondly, artificially inflate imports in order to boost its GDP.

By inflating its imports from the US, China is looking to increase its leverage as imports will fall in 2022 without the goodwill of Chinese communist party.

It is also important to note that most of the US exports to China are commodities such as pulp, oil and farm products, and the deal is about giving Trump the appearance of an easy “win”.

The share of the US in hi-tech exports to China is falling continuously and we don’t see any commitments on US-made medical equipment, American automobiles and aircraft.

What Washington really needs to do is to look into the Hong Kong problem. The US now exports $40 billion worth of goods to Hong Kong and the bulk of that ends up in China. This is by no means a trivial task, albeit not an impossible one.

The writer is a Cambridge graduate and is working as a strategy consultant

 

Published in The Express Tribune, January 6^th, 2020.

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