US-China "Phase One" Trade Agreement

06 January 2019

"Phase One":

· Tariffs reduction

· Higher US products purchases

· Intellectual property

· Financial services

· Currency

"Phase One"

The United States and China recently agreed on the terms of a "phase one" trade agreement. It provides for the reduction of some US tariffs on Chinese goods, while increasing Chinese purchases of American agricultural, energy and manufacturing products and addressing some US complaints on intellectual property rights. Under the agreement the United States will not impose the 15% tariffs on nearly $160 billion of Chinese goods, such as cell phones, laptops, toys and clothing, and will reduce the tax rate (introduced in September) to 7.5% on $120 billion of Chinese goods. At the same time, China will cancel its retaliation rates, including a 25% tariff on cars manufactured in the United States. In addition, the agreement includes stronger Chinese legal protections for patents, trademarks, copyrights, including better criminal and civil proceedings against online infringement, pirated and counterfeit goods. China is also expected to make a commitment to refrain from competitive currency devaluations, and to ensure better access to the Chinese financial services market for U.S. companies, including banking, insurance and rating services. The deal would therefore increase imports of financial services from the United States.

The Products Involved

According to some US officials, China has agreed to increase purchases of American products and services by at least $200 billion over the next two years. Purchases include manufactured goods, energy, services (including financial services), but the products that would seem to be most involved are agricultural ones. Although many details of the deal are still unclear, large purchases of agricultural products are a key clause imposed by the United States for a trade agreement. In fact, China has agreed to do its best to meet Trump's request to buy $50 billion worth of American agricultural goods each year. China has also undertaken to reduce non-tariff barriers on agricultural products such as poultry, seafood and feed additives, as well as the approval of biotechnological products. A central role is represented by soybean, feed mainly used for pork. According to USDA data, China has recently started making large purchases of soybeans, as well as large US pork purchases. These two products represent the most valuable agricultural exports to the United States.

“Phase One” Effects On The Rest Of The World

Certainly, the trade agreement between the United States and China could be positive for the two nations, establishing greater balance from a commercial point of view. At the same time, we believe it is important to consider any negative consequences that this could have on other countries. China's commitment to import more US products could push the country to cut back on purchases it currently makes from other suppliers. Many countries are concerned about this situation. If we think of two of the products that would seem to be at the center of the treaty, pork and soy, there are many countries that could be affected by the agreement. Chinese soybean imports to the United States more than doubled in November after the announcement of “Phase One”, a sign that the decrease in tensions could lead to a sharp increase in purchases by China. Chinese soybean demand is estimated to be $40 billion a year. For the Chinese, respecting American constraints (buying about $50 billion of American agricultural products a year) would mean meeting demand almost entirely by purchasing the US product. This would require diverting market share from other countries, such as Argentina, Australia, Brazil, Canada and New Zealand, which export substantial quantities of agricultural products to China. These nations could therefore suffer from the trade agreement, losing exports not because they cannot compete but because China is forced to buy American products to avoid tariffs. Even in the case of imports of pork, some countries may find themselves in the same situation. Over the past year, Chinese demand for imported pork has intensified as African swine fever has decimated local herds. The European Union is the second largest producer in the world after China and the largest exporter of pork. Germany, Spain and France represent half of the total EU production. The EU currently exports approximately 13% of its total production almost entirely to China. Not only the European countries, but also South America could be affected by the commercial agreement on pork. Argentina and Brazil have in fact approved a series of new meat export plans to meet the demand for beef, chicken and pork in China. However, these plans risk being cut off if China agrees to concentrate its purchases mainly in favour of the United States.

China's commitment to import more US products could push the country to cut back on purchases it currently makes from other suppliers.

To Conclude...

Although the details have not been disclosed yet, we believe that on one hand the commercial agreement will have positive effects on the tensions that have occurred in recent years between the United States and China, but on the other we think it is important to take into account the negative implications that this may have on the rest of the world. According to the data, the goal to achieve is difficult. The purchase amount imposed by Trump is very high compared to the expected product demand, and it will therefore be difficult for China to respect the numbers. This could push the country, in order to comply with the agreement and avoid the risk of new tariffs, to buy products mainly from the United States, thus excluding the other exporting countries. The rest of the world could therefore be affected by a mechanism in which trade depends, not on fair competition between countries for price and quality of products, but on the imposition of tariffs.