Author: James Urbach, Director, Global Banking
On January 15, 2020, President Trump signed the Phase 1 China Trade Deal, calling a truce on negotiations that had persisted for over a year. The agreement relaxes previous tariffs levied against the country and begins to reopen many doors that have been closed to American business during the lengthy trade talks.
While the Phase 1 deal does not achieve the complete list of reforms the President’s administration was seeking, it sets the stage for future cooperation between the U.S. and China. Below are the some of the biggest highlights impacting American businesses.
Under the agreement, the U.S. conceded tariffs on $160 billion in Chinese exports that were set to go into effect in December of 2019, including popular consumer goods, such as cell phones and laptops. Existing tariffs on $110 billion worth of goods the U.S. buys from China were also cut in half to 7.5 percent.
However, tariffs of 25 percent remain in place on nearly $250 billion worth of the goods that the U.S. buys from China, including chemicals and machinery necessary for manufacturing.
According to Chad Bown of the Peterson Institute for International Economics, nearly two-thirds of Chinese imports that were hit by Trump’s tariffs will remain. In addition, tariffs levied on China’s exports into the U.S. have risen from 3 percent in January 2018 to 21 percent under the new agreement, including many products used in manufacturing, such as haymaking machinery and combine harvest threshers.
The higher tariffs could result in a continued slump for U.S. manufacturers. According to the Institute for Supply Management, the Purchasing Managers Index (PMI), a leading indicator of economic trends in the sector, fell to its lowest point since 2009 in December of last year.
On the positive side, the Phase 1 deal does offer protections for intellectual property which could be good news for the sector. However, optimism includes a healthy dose of skepticism, as businesses wait to see how stringently China follows provisions within the deal.
While the Phase 1 China Trade Deal is a step in the right direction, there is speculation that China may not hold up its import commitments.
Under the deal, China has agreed to import nearly $80 billion in additional manufacturing goods and over $50 billion in energy supplies, as well as a $35 billion increase in services over the next 2 years. Additionally, the country is slated to import an additional $32 billion in agricultural products over the same time period.
However, Vice Premier Liu said that “sales would depend on domestic demand and U.S. prices.”
For example, U.S. beef producers entered China in 2017 after a 14-year absence. By the end of 2019, Chinese imports of U.S. products had increased nearly 35 percent year-over-year but remained well behind the number of beef imports from other countries.
Under the Phase 1 China Trade Deal, a combination of tariff waivers on beef imports, and the release of certain regulations, could make it easier for American farmers to compete in the market. However, if demand for beef products falls, China may reduce imports from the U.S., regardless of its agreement under the Phase 1 deal. It’s also important to note that the deal contains a clause that each party could delay complying with their obligations in the event of a natural disaster. A case that could be made for the outbreak of the coronavirus.
Another factor to consider when sizing up the strength of China’s commitment is the country’s current import practice. For example, in 2018 during trade negotiations, China leveraged a 25 percent tariff on soybean imports from the U.S. and then ramped up imports from other countries, such as Brazil, including an October 2019 purchase of 480,000 tons.
For China to meet quotas on American products under the Phase 1 China Trade Deal, they will need to reduce the number of imports from other countries. Another question focuses on enforceability. While the agreement includes a mechanism to enforce its rules, some experts fear that China could blame the U.S. if the country fails to meet import quotas.
In summary, the Phase 1 deal is a good starting point for future negotiations and demonstrates a willingness on the behalf of China and the U.S. to extend concessions. However, there is still work to be done.
While tariffs on U.S. products to China have been reduced, many industries are still competing against countries that have no tariffs. For example, while U.S. soybean farmers could see an increase in demand from China, they are now in stiff competition with countries in South America that don’t have the high cost of tariffs to contend with.
In the end, it’s progress toward building a relationship of economic trade, and possibly an eventual agreement that eliminates tariffs in the name of free trade.
With 25 years of experience, Jim Urbach has developed an uncommon understanding of Global Banking including products, services and business development focused on financial institutions and technology companies. Currently, Jim is responsible for Global Banking across FNBO’s financial institutions vertical and the Colorado and Western Nebraska markets. Jim enjoys creating simple and transparent solutions that reduce the complexity of doing business internationally.