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'Phase one' trade deal deep dive: Commitments versus enforcement

The Supply Chain Daily provides a curated overview of Panjiva's research and insights covering global trade policy, the logistics sector and industrial supply chains and draws from global shipping and freight data.

Come for the commitments, stay for the enforcement — Trade War Show season 4 begins
The U.S. and China signed their long-awaited phase one trade deal, ending a process of escalation — which we dubbed the Trade War Show — that began in August 2017.

The U.S. appears to have made no commitments in the phase one document and is only offering a modest roll-back to list 4A product duties from Feb. 14. The duties covered $120.2 billion of imports in the 12 months to Nov. 30. These imports declined 26.4% year over year in the three months to Nov. 30.

China's commitments meanwhile are manifold, particularly in relation to intellectual property, restrictions on foreign investment and access to financial services. It is the purchasing commitments, however, that may define the deal's success or otherwise. Panjiva's detailed analysis of the 548 products covered shows the commitments will be far from easy to deal with.

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China committed to importing $131.9 billion of manufactured products, ranging from industrial equipment to chemicals, as well as consumer goods, in 2021. That represents a 160.3% uplift versus 2017, or $81.2 billion of extra imports. The commitment could add 13.4% to U.S. exports of those products though many are bought by private enterprises that won't be easily directed.

The manufacturing commitment also includes semiconductors — where the U.S. is trying to limit technology development — and aerospace where China is supporting its own industry.

Imports of agricultural products need to reach at least $40 billion in 2020, representing a 91.1% rise versus 2017. That would add 13.9% to U.S. agricultural exports though this could include diversions from other countries, and the Chinese government has said it will only buy in line with market conditions.

Energy purchases are to reach $45.5 billion, representing a 495% rise, which could be easily met by diverting oil and LNG exports bound for other countries.

Services imports of $111.2 billion in 2021 would represent a 98.5% rise and represents the most ambitious and least tangible commitment. It will require the cooperation of U.S. financial services firms.

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The enforcement process will be key to providing certainty for supply chain planning across the U.S. and China. In that regard tracking the purchase commitments should prove simple while the review process is clearly defined.

However, timeframes and more importantly sanctions for review and noncompliance are unclear, leaving significant uncertainty about whether the deal may fall apart with little notice. Indeed, either party can withdraw with just six days notice.

Companies are likely to continue to reduce their exposure to China as a result, continuing an ongoing trend. Among more recent tariff applications, U.S. furniture imports from China fell to 44.4% of the total in the past 12 months from 49.6% in 2016. In apparel the ratio fell to 35.0% from 40.3%.

Phase two talks will likely focus on Chinese state subsidies and support for state-owned enterprises, as well as technological developments. On the latter there are already signs of a hardening of the U.S. stance with State, Commerce, Treasury and Defense already acting to restrict Chinese access to U.S. technology. Chinese firms have already accelerated their semiconductor imports from the U.S. with 32.3% year-over-year surge in the 12 months to Nov. 30.

Finally, external risks to the deal are unlikely to come from the WTO — the deal may break its rules but dispute settlement is in flux — but rather from the U.S. election process where Democratic Party challengers may attempt to outflank President Trump in being tough on China.

(Panjiva Research - Policy)

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TSMC faces defense pressure to shift chipmaking as U.S. demand wanes
The U.S. Department of Defense is considering a change in procurement rules such that only U.S.-made semiconductors can be used in military purchases. It has reportedly pressured Taiwan Semiconductor Manufacturing Company Ltd. (TSMC) to shift production to the U.S. to compensate.

That comes against the backdrop of China's rise as a global exporter of semiconductors — exports in 2019 jumped 21.4% year over year to reach $101.6 billion compared to Taiwan's $100.0 billion. Shifting production and related downstream supply chains is a multibillion dollar, multiyear proposition.

Taiwan's exports of semiconductors to the U.S. represented 11.5% of the total $32.4 billion of imports in the 12 months to Nov. 30. Total U.S. imports fell 15.9% year over year. Taiwan's exports to the U.S. are led by specialty systems where Taiwan represented 22.2% of U.S. imports and where shipments from China have been in decline. Taiwan also represented 27.5% of memory shipments to the U.S. and 5.4% of processors.

(Panjiva Research - Tech. Hardware)

Hapag-Lloyd the best of a bad lot as container lines suffer poor Q4
U.S. inbound volumes of containers fell by 7.8% year over year in the fourth quarter after a 10.6% drop in December. This was due in part to the demand-drag from the U.S.-China trade war as well as the timing effect of earlier stockpiling.

Among the major container lines the worst performers were Hyundai Merchant Marine Co.Ltd. and CMA CGM SA with declines of 16.3% and 12.6% respectively in the fourth quarter while Hapag-Lloyd AG did best with a slip of just 3.5%.

Hapag-Lloyd's CEO, Rolf Habben Jansen, has indicated that "trade conflicts can have an impact on trade routes" and that the firm will "have to live with these possible fluctuations." Hapag-Lloyd appears to have done so successfully with U.S. inbound shipping by the firm from Asia ex-China rising 19.1% in the fourth quarter. There are risks for the firm however from worsening U.S.-Europe trade relations given Europe represented 30.1% of Hapag-Lloyd's U.S. inbound volumes in 2019.

Competitive conditions among the container lines are unlikely to change significantly in 2020. There is already a high level of concentration among the container lines. There is also likely to be a continuance of shipping alliances. Hapag-Lloyd's THE Alliance did best of the big three groupings with a decline of "just" 7.3% in the fourth quarter.

(Panjiva Research - Logistics)

S&P Global Market Intelligence are owned by S&P Global Inc.

Christopher Rogers is a senior researcher at Panjiva, which is a business line of S&P Global Market Intelligence, a division of S&P Global Inc. This content does not constitute investment advice, and the views and opinions expressed in this piece are those of the author and do not necessarily represent the views of S&P Global Market Intelligence.

The Supply Chain Daily has an editorial deadline of 5:30 a.m. ET. Some external links may require a subscription. Links are current at the time of publication. S&P Global Market Intelligence is not responsible if those links are unavailable later.