The Expiry of Phase One Sino-US Trade Deal

By guest author Louis Chan from Research arm of the Hong Kong Development Council Hong Kong

 

On  January  15, 2020 the US and mainland China signed a phase one trade agreement under which the US suspended some tariff increases and rolled back others in return for what the White House called “structural reforms and other changes to China’s economic and trade regime.” As part of the deal, the US agreed to reduce from 15 % to 7.5 % the Section 301 additional tariff on List 4A goods imported from the mainland, effective  February 14, 2020. In addition, it refrained from imposing Section 301 tariffs on List 4B products and kept the additional tariffs on List 1, 2 and 3 goods at 25 %.

Other important commitments made by the US included authorising the importation of five species of commercially produced fresh citrus fruit (pummelo, Nanfeng honey mandarin, ponkan, sweet orange and Satsuma mandarin) from the mainland, effective April 1 , 2020, authorising the importation of mainland fresh jujube fruit, effective  March 12, 2020, and the expansion and revision of phytosanitary requirements for imports of mainland fresh fragrant pears, effective  March 27, 2020.

The mainland, likewise, made various commitments in a number of areas, including intellectual property, trade in food and agricultural products, technology transfer, financial services, macroeconomic policies, exchange rate matters, transparency, and bilateral evaluation and dispute resolution. It also agreed to import various US goods and services in calendar years 2020 and 2021 in a total amount that would exceed the mainland’s annual level of imports for those goods and services in 2017 by no less than USD 200 billion. This USD 200 billion of increased imports was broken down as follows:

  • additional US exports of specified manufactured goods (i.e., industrial machinery, electrical equipment and machinery, pharmaceutical products, aircraft, vehicles, optical and medical instruments, iron and steel, and other manufactured goods) should be at least USD32.9 billion in 2020 and at least USD44.8 billion in 2021;
  • additional US exports of specified agricultural goods (i.e., oilseeds, meat, cereals, cotton, other agricultural commodities and seafood) should be at least USD12.5 billion in 2020 and at least USD19.5 billion in 2021;
  • additional US exports of specified energy goods (i.e., liquefied natural gas, crude oil, refined products and coal) should be at least USD18.5 billion in 2020 and at least USD33.9 billion in 2021; and
  • additional US exports of specified services (i.e., charges for use of intellectual property, business travel and tourism, financial services and insurance, other services, and cloud and related services) should be at least USD 12.8 billion in 2020 and at least USD 25.1 billion in 2021.

The purchase commitments included in the phase one trade agreement expired on  December 31, 2021. Plans for a phase two trade agreement were discussed in 2020 but never came to fruition.

The Expiry

According to the most recent estimates of the Peterson Institute for International Economics (PIIE), from January 2020 through to November 2021 the mainland met 62 % of its purchase commitments for goods when measured using mainland import statistics (USD 221.9 billion out of a pro‑rated target of USD 356.4 billion), with that share dropping to 60 % when measured using US export statistics (USD 199.2 billion out of a pro‑rated target of USD 330.9 billion).

The mainland’s compliance with its phase one purchase commitments for goods has been uneven across product types. Specifically, from January 2020 through November 2021, the mainland met 76 % of its agricultural purchase commitments when measured using mainland import statistics (USD 56.3 billion out of a pro‑rated target of USD 74.0 billion) or 83 % when measured using US export statistics (USD 57.4 billion out of a pro‑rated target of USD 69.3 billion). Major US exports of agricultural products to the mainland during the reference period included corn, beef, grain sorghum, wheat and edible offal, while products whose exports lagged included soybeans, frozen fish, crustaceans, and fresh apricots, cherries and peaches.

With regard to specified manufactured goods, the mainland met 62 % of its purchase commitments when measured using mainland import statistics (USD137.0 billion out of a pro‑rated target of USD 222.1 billion) or 59 % when measured using US export statistics (USD 117.8 billion out of a pro‑rated target of USD 198.9 billion). The shortcomings have been caused primarily by substantially lower shipments of aircraft, motor vehicles, telephone sets and certain woods during the reference period, while exports of electronic integrated circuits and machinery to manufacture semiconductor devices or electronic circuits have seen vigorous growth.

When it comes to specified energy goods, the mainland only met 47 % of its purchase commitments between January 2020 and November 2021 when measured using mainland import statistics (USD 28.6 billion out of a pro‑rated target of USD 60.3 billion) or 38 % when measured using US export statistics (USD 24.0 billion out of a pro‑rated target of USD 62.7 billion). US crude oil exports did particularly poorly in the mainland market in 2021 when compared to 2017, while coal and lique fied natural gas have fared well.

With respect to purchase commitments for specified US services, available data from the US Bureau of Economic Analysis (BEA) show that those purchases actually declined from 2017 baseline level – an estimated USD 54.2 billion – to an estimated USD 38.1 billion in 2020. If travel and transport services – which were down considerably on a global basis due to the coronavirus pandemic – are excluded from the calculation, US services exports are thought to have increased from USD 18.1 billion in 2017 to USD19.4 billion in 2020, for a gain of USD 1.3 billion compared to the required USD 12.8 billion gain under the purchase commitment for 2020.

The Way Forward

While there are no penalty provisions in the trade deal, over the past two years, US lawmakers and trade officials in both the Trump and Biden administrations have repeatedly voiced their frustration over the mainland’s failure to adhere to its purchase commitments under the phase one trade agreement.

In her October 4, 2021 speech before the Washington, DC‑based think tank Center for Strategic and International Studies, US Trade Representative Katherine Tai laid out the US’s new approach to the Sino‑US trade relationship.

She gave no indication that the existing Section 301 tariffs will be lifted and in fact suggested that more tariffs could be imposed if the mainland does not take sufficient actions to address US concerns. She stated that the Biden administration will re‑align its trade policies toward the mainland around four priorities.

One of these points is to discuss with the mainland its performance under the phase one trade agreement, including its purchase commitments for agricultural products. The US intends to address “serious concerns” that were not addressed in the phase one deal related to the mainland’s state‑centred and non‑market trade practices, including policies and practices that distort competition by propping up state‑owned enterprises and limiting market access, as well as other coercive and predatory practices in trade and technology.

Some of these discussions have already taken place but no further commitments or deliverables had been announced by either side to date. It is however worth noting that in a virtual summit with President Xi held on  November 16, 2021, President Biden reiterated the need to protect US workers and industries from unfair trade and economic practices. He also highlighted the need for “common‑sense guard rails to ensure that competition does not veer into conflict and to keep lines of communication open.”

There is no question that the mainland has failed to meet its phase one purchase commitments. However, the unforeseen global pandemic resulted in problems with production and shipping that severely undermined its ability to comply with these commitments. With regard to the global shipping woes, a recent White House blog post indicated that the share of cargo containers shipped from the US to Asia that are empty has risen from about 55 % in the five years preceding the pandemic to more than 70 % in 2021. This was attributed to a sharp increase in the cost of shipping between the US and Asia, which has made it more profitable for ocean carriers to quickly load empty containers or return to Asia without a full ship instead of waiting for loaded containers to reach the US port.

According to the White House, however, this situation “raises questions about the fair treatment of American exporters and importers” by the three global shipping alliances that control about 80% of the global shipping market (up from 29 % a decade ago) and 95 % of the East‑West trade lanes. To a certain extent, these developments might have impeded effective compliance with the purchase commitments.

Be that as it may, the Biden administration is expected to follow through on its commitment to hold the mainland to the provisions of the phase one trade agreement, although it remains unclear how the purchase and other commitments may be effectively enforced beyond the expiry date. Potential US options if a mutually agreeable understanding is not reached would include (1) raising the current 25 % Section 301 tariff on List 1, 2 and/or 3 goods; (2) raising the current 7.5 % Section 301 tariff on List 4A goods; and/or (3) imposing Section 301 tariffs on List 4B goods.

At the same time, Beijing appears unlikely to make any major further commitments unless the US agrees to give something tangible in return, such as the outright removal of or at least a significant reduction in the Section 301 tariff on a mutually agreed set of products.

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