“Phase One” Agreement: China Won’t Fulfill Its 2020 Commitments

Tensions between the U.S. and China could gain traction in a context where latest trade figures (May) confirmed that China won’t be able to fulfill its 2020 commitments related to purchases of U.S. goods. Even if the coronavirus pandemic can be an excuse to explain a part of the recent weakness, several analysts (including me) have already expected a miss since January.

In the details, Chad P. Bown, a senior fellow and trade data expert at the Peterson Institute for International Economics, highlighted that “Through the first five months of 2020, China’s purchases were thus only at 39 percent (US exports) or 49 percent (Chinese imports) of their year-to-date targets.”

 

 

Focusing on U.S. data for May, my analysis shows that, using a linear extrapolation, U.S. exports (goods) to China would reach $64.5billion in 2020 (less than 50% of the annual target). In other words, they would decline compared to 2019 ($67.7 billion) while the “Phase One” deal implies a jump of more than 110%!

Over the same period, a Bloomberg analysis concerning Chinese imports of U.S. goods showed that “China had only bought about 19% of the total purchase target of more than $170 billion for goods in 2020. That means China needs to buy about $139 billion in the remainder of the year to meet the terms of the agreement signed in January.

All in all, even if China tries to ramp up purchases of U.S. goods in the coming months, it won’t be sufficient to fulfill its 2020 commitments. Therefore, as I noted on June 28, “U.S. officials could be tempted to increase pressure on Beijing soon in order to support 3Q U.S. GDP just ahead of the presidential election (November 3).”

Without surprise, Reuters reported that “the U.S. Chamber of Commerce and over 40 trade associations on Monday urged top U.S. and Chinese officials to redouble efforts to implement a Phase 1 trade agreement signed by the world’s two largest economies in January.”

Yet, Chinese officials would probably disagree especially if, as suggested by Bloomberg, “Trump is considering two or three actions against China, with a high probability something could be unveiled soon — more likely in days than weeks.” In addition, yesterday, Secretary of State Mike Pompeo told Fox News that “The U.S. is “looking at” banning TikTok and other Chinese social media apps.”

Finally, in the short term, investors will have to focus on the lobster industry. According to press reports, White House trade adviser Peter Navarro said Donald Trump is directing U.S. Trade Representative Robert Lighthizer to report by July 15 on whether China is beginning to comply with $150 million in lobster purchase commitments under the “phase one” agreement. If not, Trump told Lighthizer to consider placing retaliatory tariffs on the Chinese seafood industry.

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