China is currently set to meet just 14% of its energy product obligations; 45% of agreed agricultural; 57% of required manufactured goods for a total of 45% of its overall 2020 targets under the terms of the Phase One Trade Agreement. A period of much increased trade tension between the US and China likely lies ahead in our view.

Not impossible, but getting pretty close?

We have maintained an increasingly sceptical view on whether it was even possible for China to meet it’s energy purchase obligations under the phase one trade agreement – (see Can China actually buy US$50bn of US energy products? and So how is that phase one deal going?)

As of the end of May, despite a sharp increase in purchases, China is set to meet just 14% of its energy product obligations under the terms of the Phase One Trade Agreement. Indeed, to meet the agreement, it would have to step up its purchases by a factor of 18 times the average purchase in the first five months of the year, and buy that amount in every month through to the end of 2020.

That would appear to be extremely difficult to achieve – in fact it is probably getting pretty close to impossible. If we take the total value of US exports of the energy products captured in the agreement in the last year, China would have to import 40% of those exports in every month through the rest of this year. Again, not impossible, but given the current intense congestion from crude carriers at Chinese ports, probably very close!

Having noted the increasingly prohibitive numbers surrounding the energy obligations, China is slightly closer to meeting its objectives for manufacturing and agricultural products. As of the end of May, China is on track to meet 45% of the agreed 2020 agricultural purchases and 57% of manufactured goods.

To meet those objectives, China will need to triple the average seasonally adjusted run rate for the year so far for agricultural products and more than double it for manufactured goods.

Both look difficult to achieve given the intense seasonality in agricultural products and also given that there has been no increase in the very stable level of manufactured goods purchases in 2020 so far. This then means that China is currently set to meet just 45% of its overall 2020 target

Not just about trade targets?

Now as we noted last month, it is not obvious when success or failure will be measured, and to what extent this will be judged on numerical trade targets alone. After all, it is important to highlight that trade expansion is just one chapter within a complex agreement which includes agreements on:

• Intellectual property including sections on protecting trade secrets and confidential business information
• Technology transfer including sections on scientific and technological cooperation
• Trade in food and agricultural products including sections on accepting USDA and FDA audits and standards
• Financial services including sections on opening up banking services, credit rating services, electronic payment services, insurance, securities, fund management and futures services within agreed periods of time.
• Exchange rate practices designed to avoid “manipulating exchange rates … to gain an unfair competitive advantage”.
• Expanding trade including a “commitment that purchases and imports into China will be no less than $32.9bn above the corresponding 2017 baseline amount” for specified manufactured goods; “$12.5bn above the corresponding 2017 baseline amount” for agricultural goods and “$18.5 billion above the corresponding 2017 baseline amount” for energy products.

So, it is clear that numerical trade expansion obligations are not the only measure of whether China is meeting its agreed objectives. However, these measures are finite, can be observed and thus tracked.

Given that both the value and volume of imports so far in 2020 remain so far behind 2017 levels, let alone the significant step up required to meet agreed 2020 targets and are not showing significant signs of picking up, we stand by our earlier scepticism that it is unlikely that China will be able to meet its obligations under the phase one trade agreement. A period of much increased trade tension between the US and China likely lies ahead in our view.

Methodology

The agreement specifies targets above a 2017 baseline for a specified list of products. Using the baseline formula plus the very detailed list of 4 and 6 digit HS codes, we calculate those targets to be $83.3bn of manufacturing products; $33.4bn of agricultural products and $26.5bn of energy products for a total of $143.2bn.

To achieve our run rates, we seasonally adjust total imports using the United States Census Bureau. X-13ARIMA-SEATS model in R Studio and then gross up that average to achieve the annual run rate.

The agreement also includes targets on services for which monthly data is not available so we cannot include services in the above analysis. On top of this, about a third of goods exports from the US to China in 2017 are not covered by numerical targets and thus not analysed here.

Recent official comments on US China trade

7th May 2020: The joint call between Vice Premier Liu He, U.S. Treasury Secretary Steven T. Mnuchin, and Ambassador Robert Lighthizer that took place on 7th May concluded that “both countries fully expect to meet their obligations under the agreement in a timely manner“.

21st May 2020: The USTR announced that US producers could export a wide range of products including blueberries, Hass avocadoes, barley and dairy powder to China and that “Under President Trump’s leadership, we fully expect this agreement to be a success”.

6th July 2020: The United States Council for International Business wrote to Mnuchin, Lighthizer, and Vice Premier Liu encouraging “both sides to redouble efforts to implement all aspects of the Agreement, including purchases of U.S. manufactured goods, energy products, services, and agricultural goods, where implementation appears to be lagging“.