U.S.-China Phase 1 Trade Agreement — Data through December 2020; China has increased purchases of agricultural and energy products above 2017 levels but did not reach first year agreed purchases in 2020 and won’t reach the agreed level even if measured from March 2020-February 2021

U.S. December export data were released earlier this week. While there are some improvements in some categories of merchandise exports in December (particularly in major agricultural categories, liquefied natural gas and crude oil), China remains far behind its overall commitments in the U.S.-China Phase I Trade Agreement for first year purchases of U.S. goods. 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, although the level of actual implementation remains unclear. With a change of U.S. Administrations on January 20, 2021, it is unclear what the Biden Administration’s approach will be to China and its myriad trade practices that have been of concern to businesses, workers, Congress and the prior Administration.

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, China continues to indicate its intention to honor the Phase I Agreement. 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.

For purposes of this post, I will look at the March-December data, but I will also reference calendar 2020 data.

Looking at U.S. domestic exports for the March – December period and projecting for a full twelve months (March 2020-February 2021) shows China meeting 94.31% of first year agriculture commitments, and significantly above 2017 actual levels. Total Phase 1 products are projected at only 59.81% of first year commitments with manufactured goods at 52.37% and energy at 41.70%. While agriculture products are projected to exceed 2017 actual by $10.6 billion and energy is projected to exceed 2017 by $3.3 billion, manufactured goods are projected to be $10.5 billion smaller than 2017 actual. Compared to first year purchase commitments, total U.S. Phase I goods exports are projected to be $60.5 billion short of the agreed first year level.

If calendar year 2020 is examined, then U.S. domestic exports of all Phase 1 goods met only 55.64% of the agreed levels with manufactured goods at 51.80%, agricultural products at 81.58% and energy goods at 35.92%.

Under either first year period examined, agricultural and energy product have exceeded what was achieved in 2017 during the first year, though that will not be the case for manufactured goods. Under neither scenario do any of the three goods groupings meeting the first year agreed commitments.

To meet first year commitments, China would have to import monthly 5.03 times the product from the United States as was done in the first ten months in the next two months (January – February). On a calendar basis, U.S. domestic exports missed the agreed level on goods by $66.8 billion

Under the March-February analysis using data through December, the U.S. domestic exports of goods covered by Phase I to China for the first ten months were slightly ahead of 2017 levels ($75.1 billion vs. $73.6 billion) and are projected to exceed the actual 2017 U.S. exports ($90.125 billion projected vs. $86.795 billion 2017 actual). The calendar year 2020 missed the 2017 actual by almost $3 billion ($83.849 billion vs. the 2017 actiual of $86.795 billion). Moreover, since non-covered U.S. exports have declined in 2020 versus 2017, under neither scenario do total U.S. domestic exports reach the 2017 level of $120 billion ($117.258 billion projected for the March-February period; $110.576 billion actual for calendar 2020).

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 20.40% for calendar year 2020. Services trade data with China for 2020 is available for the first nine months of 2020 and shows U.S. exports of services down 34.08% in the first three quarters of 2020 versus 2019. 2019 US exports of services to China were $56.537 billion, slightly higher than 2017 US exports of services to China of $54.981 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, November 2020 (January 7, 2021) and December 2020 (February 5, 2021). 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). Thus, the limited data available indicate that U.S. services exports to China will likely miss 2017 levels by more than 32% and will obviously not show any gain above 2017.

Looking at total U.S. domestic exports of goods to China for the period March-December 2020, U.S. exports were $98.059 billion ($9.806 billion/month) compared to $101.749 billion in 2017 ($10.175 billion/month). These include both products covered by the Annex 6.1 commitments and other products. For calendar year 2020 total U.S. domestic exports to China were $110.576 billion ($9.215 billion/month) compared to $120.109 billion in 2017 ($10.009 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 – December, non-covered products (which face significant tariffs in China based on retaliation for US 301 duties) have declined 18.55%, and total exports to China are down 3.63%. Looking at 2020 calendar figures show other U.S. domestic exports (i.e., not covered by the Phase I Agreement) were down 19.78% from comparable levels in 2017.

Thus, the first ten 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 $90.125 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 $27.133 billion, for total U.S. domestic exports to China of $117.259 billion. This figure would be below 2017 and dramatically below the target of $184.0 billion (if noncovered products remain are at 2017 levels; $177.421 billion with noncovered products at estimated 2020 levels) . The projected U.S. domestic exports to China would, however, be higher than the $109.72 billion in 2018 and the depresssed figure of $94.100 billion in 2019.

If one looks at calendar year 2020 actual data, U.S. domestic exports to China of Annex 6 goods were $83.849 billion, other exports of $26.726 billion, for total domestic exports in 2020 of $110.576 billion even further behind 2017.

To achieve the target level of U.S. exports in the January-February 2021 period, U.S. domestic exports of the 18 categories of goods in Annex 6.1 would have to be $75.573 billion ($37.786 billion/month) an amount that is 5.02 times the monthly rate of exports of the 18 categories to China in the March – December 2020 period ($7.512 billion/month).

As noted earlier, if one uses the 2020 calendar period, U.S. domestic exports of goods in Annex 6.1 fell $66.846 billion short of the first year agreed amounts.

Chinese data on total imports from all countries (in U.S. dollars) for calendar year 2020 show a decline of 1.1% from 2019. General Administrator of Customs of the People’s Republic of China, China’s Total Export & Import Values, December 2020 (in USD). China’s imports from the U.S. were up 9.8% during the same time period, but show imports from the U.S. substantially larger than U.S. domestic exports ($134.907 billion vs. $110.576 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).

The 18 product categories included in Annex 6.1 of the Phase 1 Agreement show the following for March-December 2017, March-December 2020 and rate of growth for the first year of the Agreement (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 1.1% in calendar year 2020 while up 9.8% from the United States. Thus, the Phase 1 Agreement appeaers to have contributed to some improved U.S. export performance to China even if China is far away from meeting the year one commitments.

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. It is unclear what the Biden Administration approach will be.

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

The differences in economic systems between China and the United States have made reliance on WTO rules less relevant to the Trump Administration as those rules presume market-based economies and presently don’t address the myriad distortions that flow from the Chinese state capital system. Thus, the Phase I Agreement was an effort to move the needle in trade relations with China to achieve greater reciprocity. It has had some limited success to date. It will be interesting to see the approach on trade with China taken by the Biden Administration when its trade team is onboard.

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

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