Trade Deal Phase 1: “Righting the Wrongs”

The U.S. and China signed an initial, phase 1 trade deal on Wednesday which U.S. President Donald Trump says is “righting the wrongs of the past and delivering a future of economic justice and security for American workers, farmers and families.” 

China has agreed to purchase at least an additional $200 billion worth of U.S. farm products and other goods and services over two years, over a baseline of $186 billion in purchases in 2017. This includes $54 billion in additional energy purchases, $78 billion in additional manufacturing purchases, $32 billion in additional farm products and $38 billion in services. The agreement also includes significant commitments by China on accepting U.S. agricultural biotechnology products.

Trump says China has agreed to end its practice of forcing foreign companies to transfer their technology to Chinese companies in order to gain market access. China will address numerous longstanding intellectual property concerns in the areas of trade secrets, trademarks, enforcement against pirated and counterfeit goods, and more.

As part of the deal, the U.S. will cut in half 15 percent tariffs imposed on a wide range of consumer goods imposed in September.

Oil and Gas

Wood Mackenzie Asia Pacific Vice Chair Gavin Thompson says, what is most notable is China’s agreement to increase energy imports from the U.S. by up to $52.4 billion over the next two years. “Let’s be clear: $52.4 billion over two years is a lot of energy. But neither the five percent tariff on U.S. crude oil nor the 25 percent tariff on U.S. LNG is to be reduced or removed by China under the Phase 1 deal. For China to massively increase imports of oil and LNG from the U.S. while tariffs remain in place is going to be challenging.

“Consider LNG. In 2017, China imports from U.S. were approximately 1.5 Mt, worth around $0.6 billion. If China is to increase the value of U.S. LNG imports considerably as a part of this agreement, let’s say to around 10 Mt in 2021, then the 25 percent tariff would need to be either absorbed by the importing company, or passed through to the consumer. We expect that Chinese national oil companies will be reluctant to commit to large-scale purchases given this. 

“At the same time, the next two years will also see a slower pace of gas demand growth in China, rising domestic production, and the arrival of Russian pipeline gas, creating a more competitive gas market."

The Chinese uncontracted LNG demand is estimated to be 17 Mt in 2020 and 23 Mt in 2021; U.S. off-takers will now be looking to target this market. Contract and portfolio suppliers with contracted supply into China and U.S. off-take – notably Shell, BP and Cheniere – could also target increasing volumes of U.S. LNG within existing contracts into China if agreement can be reached with key buyers, including CNOOC and PetroChina," says Thompson.

Belt and Road

Meanwhile, China has released data indicating that trade with countries participating in the Belt and Road Initiative (BRI) posted robust growth in 2019, revealing the resilience of the world's biggest trader against "economic headwinds.”

Trade with BRI partner countries totaled 9.27 trillion yuan (about $1.34 trillion) in 2019, up 10.8 percent year on year, outpacing the country's aggregate trade growth by 7.4 percent, according to the General Administration of Customs (GAC). China has become the biggest trade partner of 25 BRI countries, GAC data showed.

Back in the U.S.

The National Retail Federation (NRF) has welcomed the phase 1 deal but said work remains to be done to end the trade war between the two countries. “NRF strongly supports the administration’s efforts to address China’s unfair trading practices but we hope this is the first step toward eliminating all of the tariffs imposed over the past two years,” NRF President and CEO Matthew Shay said. “The trade war won’t be over until all of these tariffs are gone. We are glad to see the phase one deal signed, and resolution of phase two can’t come soon enough.”

Farmers for Free Trade spokesperson and 4th-Generation Montana wheat farmer, Michelle Erickson-Jones, said: "While Phase One makes incremental progress, it remains to be seen whether it will deliver any meaningful relief for farmers like me. This deal does not end retaliatory tariffs on American farm exports, makes American farmers increasingly reliant on Chinese state-controlled purchases and doesn’t address the big structural changes the trade war was predicated on achieving. The promises of lofty purchases are encouraging but farmers like me will believe it when we see it.

"In the months ahead, we will be closely scrutinizing the purchase promises in this agreement. We will see whether Phase One takes steps to dig out from the hole the trade war created or whether like previous ag purchase promises it is all talk. In the meantime, the Administration should waste no time in returning to the negotiating table and reaching an agreement that ends the trade war for good."