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China's commitments under US trade deal only getting harder as purchases slip

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China's commitments under US trade deal only getting harder as purchases slip

The spread of the coronavirus is stifling U.S. shipments to China at a time when a host of U.S. industries were expecting export boosts from a landmark agreement between the countries.

Under the "phase one" agreement the countries reached in January to pause their crippling trade war, China committed to purchasing an extra $200 billion of U.S. goods and services from 2017 levels over 2020 and 2021. That includes $40 billion of farm products, as well as manufactured goods like aircraft, industrial machinery and refined products. So far, China is way off the pace.

To meet its 2020 commitment of $130.3 billion of total goods purchased, China needs to average $11.93 billion per month in 2020. In January and February, it bought less than half of what is needed, averaging just $4.65 billion, according to data from Panjiva, a unit of S&P Global Market Intelligence.

March data, due to be released in early May, has the potential to be even worse as the U.S. joined China in enacting social distancing measures and locking down its economy in response to the growing coronavirus epidemic.

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An April report from the Institute for Supply Management found that petroleum and coal products, textiles, transportation equipment, furniture, and machinery were among those manufacturing industries that experienced contractions in March as a result of measures to slow the spread of COVID-19. The virus has also closed plants run by U.S. companies Smithfield Foods, the world’s largest pork producer, and Tyson Foods, after they experienced outbreaks among their workers.

For China to meet this year's commitments would require not only a resurgence in Chinese demand but also the ability of U.S. producers to supply the goods, both of which seem nearly impossible as long as the outbreak has a stranglehold on the economy, said Chris Rogers, research director at Panjiva.

The World Trade Organization has warned that global trade could fall by as much as 32% in 2020 and the International Monetary Fund has predicted that the coronavirus is likely to lead to the worst recession since the Great Depression.

China's purchases of the 542 U.S. products covered by the commitments were down 18.4% year over year in January and February, according to data from Panjiva. Imports of U.S. energy fell 83.7% year over year, including drops to zero for liquefied natural gas and crude oil. Year-over-year imports of all U.S. manufactured goods by China over that span, fell by 10.4%.

A bright spot may be agriculture imports, a constant focus of President Donald Trump during the negotiations. But even though they have increased, they remain a long way short of target.

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The Chinese government said April 14 that it purchased $5.05 billion of U.S. agricultural goods in the first quarter, including a 2.1x increase in soybean shipments and a 16-fold increase in pork over that span. Cotton imports from the U.S., meanwhile, were up 43.5% in the first quarter, it said. That is still some way short of the $9.13 billion quarterly pace it needs to achieve to meet its 2020 commitment of $36.5 billion.

"For them to buy that much product in a crazy quarter bodes well for them meeting their commitments," said Dermot Hayes, an Iowa State University economics professor.

Asked whether China would meet its agriculture purchase commitments in 2020, he said: "I can't be confident, but I'm not skeptical." More will be revealed in the March and April trade data, which will show whether China has switched seasonal purchases of soybeans from South America to the U.S., he said.

'Phase two' prospects

While all eyes in Washington are on mitigating the domestic coronavirus crisis, Trump has made no secret of wanting a comprehensive trade victory with China ahead of the November presidential election. This would likely take the form of a "phase two" deal sought out by Washington that tackles more of the structural issues at the heart of the trade spat, like subsidies for Chinese industries and protections for U.S. intellectual property.

But analysts are largely in agreement that it will be tough to strike a deal by Election Day.

"The one certain impact of the pandemic is that it is delaying phase two negotiations, which makes it more likely that nothing will be resolved before the election," Bill Reinsch, senior adviser at the Center for Strategic and International Studies, said in an interview. "The Chinese are not going to meet our demands, so the president ultimately will either have to postpone or settle for less and declare victory anyway."

But Reinsch has some faith that Beijing will honor its commitments based on historical patterns. The U.S. government has pronounced itself satisfied, at least for now.

"My own observation of the Chinese has been that when you can get them to make a specific, detailed, time-limited commitment, they usually meet it because it is both obvious and embarrassing if they do not," Reinsch said. "They also appear to be meeting their other specific deadlines to make specified regulatory changes, although i gather there is one dispute about their failure so far to roll out a new [intellectual property] policy."

Erik Lundh, a senior economist at the Conference Board, was never confident of a phase two deal being reached before the election because that would require China to fundamentally rewire their economy to be more in line with the U.S. economy.

"I don't think that was ever going to happen, and that was before COVID-19," Lundh said in an interview. "There's a part of me that thinks these kinds of difficulties are going to get a whole lot worse."

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