U.S.-China Phase 1 Trade Agreement — Data through September 2020; USDA and USTR report on agriculture portion

U.S. September export data were released earlier this month. While there are some improvements in some categories of merchandise exports in September, China remains far behind its overall commitments in the U.S.-China Phase I Trade Agreement. As reported in prior posts, both China and the U.S. have taken steps to implement parts of the Phase 1 Agreement that took effect on February 14, 2020. The big question mark on the Phase 1 Agreement has been whether the agreement to increase imports from the United States is likely to be met by China. Prior posts on the U.S.-China Phase 1 Agreement can be found here: October 10, 2020,  U.S.-China Phase I Trade Agreement – first six months data on U.S. exports (March-August 2020) covered by the purchase commitments show China needing to triple purchases in next five months to meet first year commitments, https://currentthoughtsontrade.com/2020/10/10/u-s-china-phase-1-trade-agreement-first-six-months-data-on-u-s-exports-march-august-2020-covered-by-the-purchase-commitments-show-china-needing-to-triple-purchases-in-next-six-months-to-meet-fi/; September 12, 2020, U.S.-China Phase I Trade Agreement – How is China Doing to Meet Purchase Commitments for the First Year; a Review of U.S. Domestic Exports through July 2020, https://currentthoughtsontrade.com/2020/09/12/u-s-china-phase-1-trade-agreement-how-is-china-doing-to-meet-purchase-commitments-for-the-first-year-a-review-of-u-s-domestic-exports-through-july-2020/; August 8, 2020, U.S.-China Phase 1 trade agreement – review of U.S. domestic exports through June 2020, https://currentthoughtsontrade.com/2020/08/08/u-s-china-phase-1-trade-agreement-review-of-u-s-domestic-exports-through-june-2020/; July 10, 2020, U.S.-China Phase 1 Trade Agreement – limited progress on increased U.S. exports to China (through May), https://currentthoughtsontrade.com/2020/07/10/u-s-china-phase-1-trade-agreement-limited-progress-on-increased-u-s-exports-to-china-through-may/; June 5, 2020, U.S.-China Phase I Deal is Failing Expanded U.S. Exports Even Before Recent Efforts by China to Limit Certain U.S. Agriculture Exports as Retaliation for U.S. Position on Hong Kong, https://currentthoughtsontrade.com/2020/06/05/u-s-china-phase-i-deal-is-failing-expanded-u-s-exports-even-before-recent-efforts-by-china-to-limit-certain-u-s-agriculture-exports-as-retaliation-for-u-s-position-on-hong-kong/; May 12, 2020, U.S.-China Phase I Agreement – some progress on structural changes; far behind on trade in goods and services, https://currentthoughtsontrade.com/2020/05/12/u-s-china-phase-i-agreement-some-progress-on-structural-changes-far-behind-on-trade-in-goods-and-services/; January 19, 2020, U.S.-China Phase 1 Agreement – Details on the Expanding Trade Chapter, https://currentthoughtsontrade.com/2020/01/19/u-s-china-phase-1-agreement-details-on-the-expanding-trade-chapter/; January 15, 2020, U.S.-China Phase 1 Trade Agreement Signed on January 15 – An Impressive Agreement if Enforced, https://currentthoughtsontrade.com/2020/01/15/u-s-china-phase-1-trade-agreement-signed-on-january-15-an-impressive-agreement-if-enforced/.

An unusual aspect of the Phase 1 Agreement is agreement by China to increase imports from the United States of various categories of goods and services during the first two years of the Agreement with 18 categories of goods grouped in three broad categories (manufactured goods, agriculture and energy) and five services categories. Chinese imports of goods and services from the United States under the Agreement are supposed to increase by $76.7 billion in the first year over levels achieved in 2017 and in the second year by $123.3 billion over 2017 levels. The categories and tariff items included in the goods categories are reviewed in Annex 6.1 of the Agreement and the attachment to Annex 6.1. In the confidential version of the agreement, growth levels are provided for each of the 23 categories of goods and services.

While the COVID-19 pandemic has affected trade flows for most countries including both China and the United States and while bilateral relations between the U.S. and China have deteriorated since the signing of the Phase 1 Agreement, the U.S. continues to report that China intends to honor its purchase commitments in this first year. Article 6.2 of the Agreement defines the time period for the purchase commitments as being January 1, 2020 through December 31, 2021. So the first year by agreement is calendar year 2020.

However, since the Agreement took effect in mid-February, my analysis has focused on the period since the agreement went into effect (for statistics, from March 1, 2020). This is consistent with the position that USTR and USDA took in an interim report released on October 23 looking at China’s compliance with its purchase commitments in agriculture. “It is worth noting that the Phase One Agreement did not go into effect until February 14, 2020, and March is the first full month of its effect. That means that we have seen seven months of agreement sales.” U.S. Trade Representative’s Office and U.S. Department of Agriculture, Interim Report on the Economic and Trade Agreement between the United States of America and the People’s Republic of China, AGRICULTURAL TRADE, October 23, 2020, Page 1. The joint press release and interim report are embedded below.

For purposes of this post, I will look at the March-September data, but I will also reference January – September data.

The interim report from USTR and USDA indicated that for March-August, China had purchased 71% of the first year commitments (though obviously all had not been shipped). Looking at U.S. domestic exports for the March – September period and projecting for full year 2020, shows China meeting 82.73% of first year agriculture commitments if the first year is measured from March 2020-February 2021. Total Phase 1 products are projected at only 56.94% of first year commitments for the March-February year with manufactured goods at 50.46% and energy at 46.63%. If calendar year 2020 is examined, then total Phase 1 goods are projected to meet 51.40% with manufactured goods at 50.85%, agricultural products at 65.49% and energy goods at 35.33%. To meet first year commitments, China would have to import .3.47 times the product from the United States as was done in the first seven months in the next five months (October – February ) or 4.69 times the imports from the United States in the three month period of October – December if a calendar year basis is examined. Under neither time period, will first year U.S. domestic exports of goods to China meet the actual 2017 U.S. exports (although the U.S. gets close under current trends for the March-September period). Thus, none of the growth in exports above 2017 levels will be achieved in the first year.

U.S. export data on services are available quarterly for some of the relevant categories and annually for certain information. Total U.S. services exports to all countries are down 21.05% for the first nine months of 2020. Services trade data with China for 2020 is available for the first six months of 2020 and shows U.S. exports of services down41.51% from 2019 levels. 2019 US exports of services to China were $36.398 billion, slightly lower than 2017 US exports of services to China of $36.986 billion. See U.S. Department of Commerce, U.S. Bureau of the Census, Bureau of Economic Analysis, U.S. International Trade in Goods and Services, September 2020 (November 4, 2020). The Phase 1 Agreement with China has large increases in U.S. services exports in the first year of the agreement ($12.8 billion over 2017 levels – to $49.786 billion). Thus, the limited data available indicate that U.S. services exports to China will likely miss 2017 levels by more than 40% and will obviously not show any gain above 2017.

Looking at total U.S. domestic exports of goods to China for the period March-September 2020, U.S. exports were $58.885 billion ($8.412 billion/month) compared to $65.073 billion in 2017 ($9.296 billion/month). These include both products covered by the Annex 6.1 commitments and other products. For the January-September 2020 period total U.S. exports were $71.402 billion ($7.934 billion/month) compared to $83.434 billion in 2017 ($9.270 billion/month).

Total 2017 U.S. domestic exports of goods to China were $120.1 billion. The Phase 1 Agreement calls for increases on a subset of goods of $63.9 billion in the first year. Thus, the target for the first year of the U.S.-China Phase 1 Agreement is U.S. exports to China of $184 billion if non-subject goods are exported at 2017 levels.

Other U.S. domestic exports not covered by the 18 categories in Annex 6.1 were $33.314 billion in 2017 (full year). For the period March – September, 2020 figures for the 18 categories have decreased 5.73% from comparable levels in 2017. Non-covered products (which face significant tariffs in China based on retaliation for US 301 duties) have declined 18.59%, and total exports to China are down 9.51%. Looking at January – September figures for the 18 categories declined 12.02% while other U.S. domestic exports were down 20.26% from comparable levels in 2017. NOTE: compared to earlier posts, I have corrected the HS category for aircraft in the Phase 1 HS numbers which has resulted in usable figures for aircraft and reduced non-covered U.S. exports of goods.

Thus, the first seven months since the U.S.-China Phase 1 Agreement went into effect suggest that U.S. domestic exports of the Annex 6 goods will be $85.807 billion if the full year shows the same level of increase over 2017 for each of the 18 categories of goods; non-covered products would be $22.880 billion, for total U.S. domestic exports to China of $108.688 billion. This figure would be far below 2017 and dramatically below the target of $184.0 billion (if noncovered products remain are at 2017 levels; $176.019 billion with noncovered products at estimated 2020 levels) . The same is true if one looks at January-September 2020 which suggest full year 2020 exports of Annex 6 goods of $77.464 billion, other exports of $25.324 billion, for total domestic exports in 2020 of $102.789 billion even further behind 2017.

To achieve the target level of U.S. exports in the October 2020-February 2021 period, U.S. domestic exports of the 18 categories of goods in Annex 6.1 would have to be $107.389 billion ($21.478 billion/month) an amount that is 3.47 times the monthly rate of exports of the 18 categories to China in the March – September 2020 period ($6.187 billion/month).

If one uses January-September for comparison and for other US exports, with only three months data remaining in 2020, U.S. exports of goods covered by Annex 6.1 would have to be $98.661 billion or $32.887 billion/month which is 5.69 times the average of $5.782 billion of the January-September period.

Chinese data on total imports from all countries (in U.S. dollars) for January-September show a decline of 3.1% from the first nine months of 2019. http://english.customs.gov.cn/statics/report/monthly.html. General Administrator of Customs of the People’s Republic of China, China’s Total Export & Import Values, September 2020 (in USD). China’s imports from the U.S. were up 0.2% during the same time period, but show imports from the U.S. substantially larger than U.S. domestic exports ($91.448 billion vs. $71.402 billion, though Chinese imports would be CIF value vs. FAS value for U.S. exports and may include U.S. exports to third countries or territories that end up in China). China’s imports from the U.S. continue to grow in October, with China showing imports from the U.S. up 3.1% in the first ten months.

The 18 product categories included in Annex 6.1 of the Phase 1 Agreement show the following for March-September 2017, March-September 2020 and rate of growth for the first year of the Agreement versus full year 2017 (figures in $ million):

China has recovered more quickly from COVID-19 economic challenges than has the U.S. However, as reviewed above, their total imports from all countries are down in the first nine months of 2020 while up only 0.2% from the United States. Thus, while China has been increasing imports from the United States of some goods categories, it is extremely unlikely it will achieve the year one commitments of U.S. goods regardless of whether the first year is the calendar year 2020 or the twelve months March 2020 – February 2021.

Conclusion

As reviewed in prior posts, the U.S.-China Phase 1 Agreement is a potentially important agreement which attempts to address a range of U.S. concerns with the bilateral relationship and obtain somewhat better reciprocity with the world’s largest exporter. The Phase 1 Agreement has left other challenges to a Phase 2 negotiation which has not yet begun and will not begin before 2021 at the earliest. With a change of U.S. Administrations on January 20, 2021 and an announced focus on domestic challenges in the U.S., it is unclear what bilateral challenges between the U.S. and China will be addressed in 2021.

While there has been some progress on non-trade volume issues that are included in the Phase 1 Agreement and some improvements in exports of U.S. agricultural goods, there has been very little forward movement in expanding U.S. exports of goods to China in fact and a sharp decline in U.S. exports of services to China.

With the process of selecting a new Director-General for the World Trade Organization in limbo following the third round of consultations and the announcement by the Trump Administration of an inability to join a consensus on the Nigerian candidate, Dr. Ngozi Okonjo-Iweala, it is unclear when and if the WTO will be able to engage in meaningful reform efforts in the near term such that the large bilateral concerns between the U.S. and China can be brought back under the WTO or whether the world is in for many years of bilateral tensions with actions outside of the system the norm and not the exception.

Terence Stewart, former Managing Partner, Law Offices of Stewart and Stewart, and author of the blog, Current Thoughts on Trade.

To read the original blog post, please click here.