Unappreciated hazards of the US-China phase one deal



Chad P. Bown | Peterson Institute For International Economics

The centerpiece of President Donald Trump’s much anticipated “phase one” trade agreement with China, signed January 15, is a commitment by Beijing to import an additional $200 billion worth of American goods and services over the next two years. Trump is certain to cite that pledge time and again in his re-election campaign. Many experts were, of course, quick to note that China’s promised purchases are bound to fall short. In fact, a close look at the data—presented below—shows that the numbers are even more unrealistic than first believed.

That matters, because with unrealistic export targets, the deal may be doomed from the start. Other beneficial aspects of Chinese commitments in the agreement could be put in peril. Even worse, hostilities might renew, leading to a re-escalation of trade tensions currently on hold.

Fortunately for the White House, the deal is structured so that the evidence of shortfalls in those Chinese purchase pledges won’t be clear until after the presidential election in November 2020. But anyone who cares about establishing a stable and productive relationship between the world’s two largest economies should be concerned.

The phase one deal has many novel aspects. At the signing ceremony, for example, Trump’s US trade representative (USTR), Robert Lighthizer, respectfully reminded everyone that the United States and China have “two very different economic systems” and that new “trade rules and practices” must “allow us both to prosper.”

But many of these new rules and practices amount to a step backward for the global trading system. Notably, the agreement’s Chapter 6 on Expanding Trade tackles only the one-sided problem of insufficient US exports to China. It does so without mentioning “tariffs.” This was surprising, of course, because Trump’s trade war resulted in Beijing imposing retaliatory tariffs that continued to cover 56.7 percent of US exports to China as of the deal’s signing.

China’s commitment is to increase purchases from the United States valued at $134.2 billion in 2017 to a level of $210.9 billion by 2020 and $257.5 billion in 2021.

If fulfilled, the deal would result in a 92 percent increase—a near doubling—of US exports to China of the covered products between 2017 and 2021. This works out to US export growth of 18 percent on an annualized basis over 2017-21. For perspective, US export growth to China averaged only 21 percent per year when China’s economy was booming at more than 10 percent annually over 2000-07. With China’s economy currently growing much more slowly, for reasons unrelated to the trade war, sustaining 18 percent annual export growth over a four-year period would be a challenge.

But then there are the consequences of Trump’s trade war. The actual starting point to reignite US exports is January 2020. The American companies and farmers tasked with meeting the new targets have suffered through two damaging years of tariffs since those robust export numbers of 2017. US exports to China through 2019 are currently estimated to be $20 billion lower than in 2017.

Thus, China is not being asked to increase imports from the United States by $200 billion over four years (2017-21). It’s even more unrealistic. Beijing must now suddenly increase purchases by $240 billion over two short years (2019-21)—by $96.7 billion in 2020 and by $143.3 billion in 2021.

One potential political benefit of Trump’s deal is its timing. The American public will be unlikely to evaluate whether China has even met the 2020 target until well after the November presidential election. The official US trade statistics for 2020 won’t be available until March 2021.

At the same time, the clock is ticking. Failure to meet the target could result in American retaliation. The phase one agreement also contains a unique and unprecedented dispute settlement chapter with two key elements. The first is a process of bilateral consultations if, say, China has not lived up to the targets. There is no outsourcing of disputes to third party arbitrators, as exists in other agreements, such as the World Trade Organization (WTO) or the US-Mexico-Canada Agreement (USMCA).

Trump’s phase one deal with China was extraordinarily incomplete. US tariffs on hundreds of billions of dollars of trade remain in place. The agreement did not even touch major systemic issues behind the trade war, such as China’s subsidies and state-owned enterprises.

But even the most heralded part of the agreement—China committing to purchase an additional $200 billion of US exports over the next two years—appears precarious. Unrealistic export targets may imperil not only trade peace but also the trade progress required to tackle the legitimate concerns in the US-China trade relationship.


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