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Economy

Trade Deal Takes a Hit from Coronavirus

Mar 11 , 2020
  • Su Jingxiang

    Fellow, China Institutes for Contemporary International Relations

China and the U.S. signed their phase one trade deal on Jan. 15 and took effect on Feb. 14. International economists spoke highly of it, as it reflected the superb negotiating skills of the two trade teams and struck a delicate balance under extremely difficult circumstances and prevented further escalation of the trade war for the time being.

The text of the officially published agreement covers an extensive range of areas, including some so-called structural issues, such as technology transfers, intellectual property rights and financial services. Central to the deal is China’s commitment to buy U.S. goods and services in certain quantities on the basis of market demand. In return, the U.S. promised not to impose further tariffs on Chinese goods, though most of the tariffs already imposed will remain in place pending a negotiated solution in phase two. No date has been specified for phase two negotiations, but U.S. President Donald Trump proposed waiting until after the presidential election in November, which introduces a high-level of uncertainty into future China-U.S. trade ties.

According to American media reports, the agreement does not detail specific Chinese purchase commitments. Rather, it contains only a broad framework:

On top of the volume of imports from the U.S. in 2017, China will, over the next two years, purchase American goods and services with an additional value of $200 billion ($76.7 billion in Year 1 and $123.3 billion in Year 2).

The $200 billion is broken into four categories over two years:

•Manufactured goods, $77.7 billion ($32.9 billion/$44.8 billion);

•Agricultural products, $32 billion ($12.5 billion/$19.5 billion);

•Energy, $52.4 billion ($18.5 billion/$33.9 billion);

•Services, $37.9 billion ($12.8 billion and 25.1 billion). 

Overall, compared with 2017, China will need to increase its imports from the U.S. by 50 percent in 2020 and by 80 percent in 2021.

Chinese imports from the U.S. have been hit hard by the Trump administration’s trade war, falling by $31.2 billion from $153.9 billion in 2017 to $122.7 billion in 2019. If China is to reach the $200 billion additional purchase target over 2017, it will have to achieve an even bigger increase of $231.2 billion than 2019 — that is, a 62 percent increase in Year 1 and a 100 percent increase in Year 2.

The international economic community has in general observed that implementing the agreement is a big challenge for China. Some economists point to the high risks for the U.S. in the long run. As the surges in imports will be artificial, China may well end its purchases upon completion of the two-year purchase increase agreement, which would be devastating for some sectors of the American economy.

The terms of the trade agreement were agreed to before the end of last year, before the coronavirus epidemic. The impact of that on the Chinese economy has been quite evident. Socioeconomic activities came to a virtual standstill, with international flights grounded, factories and schools closed and Chinese citizens barred from entry by many countries, including the U.S. These developments have made it very difficult to implement the trade deal.

All agreements contain a ‘force majeure’ clause that allows either party to claim exemption from performance in the event of a “natural disaster or other unforeseen event.” All things considered, the COVID-19 outbreak clearly constitutes an unforeseen event, on the basis of which China may claim exemption from its obligations if it deems it impossible to fulfill the agreement. For now, however, China appears to have no intention of doing so. Moreover, it has been lowering tariffs on American goods to prepare for more purchases.

Some American politicians see the epidemic as an opportunity to weaken China politically, economically and ideologically. Secretary of State Mike Pompeo, Speaker of the House Nancy Pelosi and some other senior figures have repeatedly labeled China as America’s top rival and demanded that its Western allies jointly and comprehensively tighten economic and technological restrictions. The U.S. Department of Commerce and other government agencies are working on new plans to escalate restrictions on Chinese goods, technologies and investments in the coming months.

The COVID-19 outbreak has added new unknowns to the already uncertain phase one trade agreement. The epidemic has now reached South Korea, Japan, Iran, Italy and other countries. Europe is uneasy. According to the predictions of some international economic institutions, if the outbreak is not brought under control soon, it may even lead to an unprecedented global economic recession and political unrest, thus ending the globalization process of the past few decades. If this were to happen, the phase one trade agreement may be rendered meaningless.

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