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Sprinkling Cool Water on the Fire

Sep 04, 2020
  • He Weiwen

    Senior Fellow, Chongyang Institute for Financial Studies

US China trade.jpg

Chinese Vice-Premier Liu He, U.S. Trade Representative Robert Lighthizer and U.S. Treasury Secretary Steve Mnuchin had an online dialogue reviewing the implementation of the phase one trade deal and ended on a positive note, with both the Chinese and American sides endorsing the current progress and agreeing to keep the deal on track.

In the context of a sharp escalation of tensions between China and the United States, it may appear to some that the two countries have virtually nothing in common. The dialogue sprinkled a few drops of water over the fire and brought a sense of relief, if only a small one.

There had been various estimates before the dialogue on the progress in Chinese purchases of U.S. goods and services, as well as speculation on possible failure of the deal. Under phase one, China committed to increase its purchases of $162.1 billion in U.S. goods and $37.9 billion in U.S. services in 2020 and 2021, based on actual performance in 2017. For goods, China would increase purchases by $63.9 billion from a base of $129.8 billion in 2017 (U.S. Commerce Department data), to reach a total of $193.7 billion in 2020. Because Chinese imports from the U.S. last year were only $106.6 billion, the actual import increase for 2020 should be $87.1 billion.

According to China Customs, the country’s imports from the U.S. during the first seven months of this year amounted to $67.71 billion, $2.46 billion less than a year ago, or a drop of 3.5 percent. It represented just 35 percent of the whole year target. According to the USDOC data, U.S. exports to China in the first half of this year totaled $49.5 billion, a $2.39 billion year-on-year drop, or 4.6 percent and was only 25.6 percent of the 2020 target. Thus, a huge gap appears. What’s to be done?

It has been reported that China has stepped up its purchases of U.S. agricultural and energy products recently. In July, China had its largest single day purchase of U.S. corn. For the month, Chinese worldwide imports increased by 325 percent for wheat, 136.5 percent for corn, 147 percent for sorghum and 122 percent for pork. Chinese crude oil imports also soared to 51.29 million metric tons in July, with 3.67 million tons from the U.S., a 139.2 percent increase year-on-year. Despite all of those gains, it appears unrealistic that the whole year target can be met. 

Two misunderstandings 

There are two misunderstandings on the phase one deal. The first sees the deal as a simple, unilateral procurement arrangement that binds the Chinese side only. In fact, it covers technology transfers, IP protection, quarantine of farm products, market access for services, exchange rates and expansion of trade, with both China and the U.S. bearing obligations.

The second misunderstanding is that the above-mentioned targets have been taken as compulsory for the current year. In fact, they represent targets of procurement commitments. 

The wording of the phase one deal on Chinese purchases is commitments, including MOUs, purchase agreements and contracts. There is normally a time difference between contract signing and shipment, with some goods probably being shipped in two or three years. Some of the MOUs and agreements may not turn into final contracts because conditions could change. There is also a contract fulfillment ratio in international trade, which means that some contracts may not be fulfilled for a variety of reasons.

The commitments are also related to the following two preconditions and two variables.

Precondition one, under the WTO principle of nondiscrimination, is that China must not increase imports from the U.S. by cutting or failing to increase imports from other sources. In July, with 3.67 million tons of oil sold to China, up 139.2 percent over a year ago, the U.S. still ranked fifth as a Chinese supplier, with Russia remaining at the top a 7.38 million tons — approximately double the U.S. If we interpret the 2020 target of $193.7 billion as actual Chinese imports from the U.S., it means an increase of 81.7 percent over 2019 actual imports. In that case, China must increase its worldwide imports similarly.

But judging from the fact that over the first seven months, Chinese imports fell by 5.7 percent from the world and 3.5 percent from the U.S., an 81.7 percent increase for the whole year seems out of the question.

Precondition two is that purchase commitments are to be based on price levels and commercial considerations, because the imports are to be performed by companies, not the government. During the first seven months of this year, state-owned enterprises, along with foreign and private companies in China, accounted, respectively, for 23.1 percent, 41.5 percent and 33.7 percent of total imports. In making a purchase, a company must compare price offers from different sources before a decision is made. That means U.S. suppliers have to offer the most competitive prices. They may lose the Chinese purchase if other suppliers are more competitive. The purchase decision is also based on the buyer’s commercial considerations, such as real market demand and reasonable profit.

Variable one is natural disasters. The phase one deal stipulates that if a natural disaster occurs, both sides can discuss a possible adjustment. Soon after the signing ceremony, the unprecedented coronavirus outbreak hit the whole world.

Variable two is the export handicap of the U.S. When China meets with a U.S. export restriction on a product China wants to buy, China can refer it for consultation. 

The above elaboration illustrates why the implementation of a trade expansion in phase one cannot be measured by actual Chinese imports from the U.S. but only by progress in purchase commitments, with different preconditions and variables in mind. Therefore, joint efforts by both China and the U.S. are essential to keeping the phase one deal going. 

Reciprocal efforts essential 

The phase one deal, while playing a positive role in easing overall bilateral tensions, also needs a stable political ecology, including constructive overall bilateral relations. The current escalation of U.S. allegations and challenges of China will absolutely hurt the implementation of the deal.

For any expansion of trade, reciprocal efforts are essential.

The Chinese side needs to do its best to keep bilateral relations with the U.S. on track, increase trade flows with U.S. businesses and further encourage procurement from the U.S. according to the commitment targets. New steps broadening market access for more American financial providers in the coming months are also highly recommended.

On the U.S. side, the following three aspects are crucial for the moment: 

First, the U.S. government should refrain from further attacks and restrictions on China. The implementation of the phase one deal will undoubtedly meet with tremendous difficulties if the overall bilateral tensions continue, and especially if a possible new cold war is on the agenda.

Second, the U.S. side should drop its technology ban and restrictions on semiconductor chips and other high-tech exports to China. All those measures hamper Chinese procurement of manufactured goods from the U.S. under the phase one deal.

Third, the U.S. side should support an increase of imports from China. The phase one deal is based on equality and mutual benefits. While China supports receiving more imports from the U.S., the U.S. should do the same.

The U.S. has repeatedly demanded that China import more U.S. products, but has banned U.S. imports of China’s Huawei 5G technology and other products. It has repeatedly demanded that China give greater market access to U.S. service providers in China, but it has banned China’s Tik Tok service in the U.S. It is unfair and can derail the phase one deal. The ban on Huawei technology and products should be dropped, and Tik Tok services should be retained. Only when import increase on both sides will expansion of trade become a sustainable reality for the future. 

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