Tag Archives: US-China Economic and Trade Agreement

Silence Speaks Loudly On Biden’s China Policy

ONE THING STANDS out to this Bystander about the flurry of executive orders issued by the new US president Joe Biden to undo those of his predecessor, Donald Trump: none of them relate to China.

The one possible China-related action is a reported extension to May 27 of a deadline in Trump’s executive order that orders US institutional and retail investors to wind down their trading of the securities of 44 Chinese firms on a US Department of Defense blacklist. However, Trump’s deadline for full divestment remains unchanged, November 11.

That is in line with Biden’s clear intention not to pull back from Trump’s China policy any time soon, or at least not to declare his hand prematurely.

Meanwhile, three of China’s biggest telcos, China Mobile, China Telecom and China Unicom HK, all on the US defence department’s blacklist, are in limbo as they appeal the New York Stock Exchange’s delisting of their shares. The Biden administration has been silent on that matter, too.

It has also been quiet on the other US blacklists, the Entity List, maintained by the Bureau of Industry and Security (BIS) within the US Department of Commerce and the Commerce department’s military end-user list. Trump added many Chinese companies, most notably Huawei, to the former to cut the supply chains of Chinese technology companies through export controls, and to the latter to prevent dual-use US technology reaching the People’s Liberation Army.

In her confirmation hearings, Biden’s Treasury Secretary, Janet Yellen, indicated a continuation of a tough stance towards Beijing and wishing to bring its allies alongside it in common cause.

That already exists with regard to the presence of Chinese-made kit in 5G networks, but other trade issues of concern that Yellen highlighted, and where there could be international cooperation, include dumping, trade barriers and illegal subsidies to (state-owned) corporations.

Those should all be part of the Phase Two negotiations between Washington and Beijing of Trump’s US-China trade deal, should the Biden administration so choose to pick up the talks. Though they were meant to start immediately on the signing of Phase One of the deal a year ago, they have not stalled as a result of the combination of the disruption caused by the Covid-19 pandemic and the general deterioration of bilateral relations in the final year of the Trump presidency.

February 14 marks the first anniversary of Phase One of the deal, That date could provide the opportunity for the new administration to lay out its stance on China. Still, this Bystander expects it will prefer to continue to hold its cards close to its chest, not least until it has reviewed all its trade relationships in the Indo-Pacific and come up with a cohesive strategic strategy for the region.

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China-EU Investment Deal Riles Incoming US Administration

THE INVESTMENT AGREEMENT between China and the EU has been long in the making — seven years. Nevertheless, no sooner has agreement in principle finally been reached than it is running into criticism for undermining the prospective unified front of allies US President-elect Joe Biden plans to construct to confront Beijing. Prospective members of Biden’s administration are quietly but firmly making it clear that the agreement is premature. They say that Beijing’s last-minute concessions to get the deal done before Biden takes office were tactical moves to drive a wedge between the US and the EU.

The Comprehensive Agreement on Investment has been a high priority for Brussels. Itis being touted there as a big win.

It will open multiple industries in China to EU businesses, ranging from electric carmaking to healthcare and cloud computing. It will also put EU financial services on the same footing as US rivals by matching the opening of the insurance and asset management sectors achieved for US firms in the Phase One US-China trade deal struck a year ago. EU firms will also get similar assurances as US firms on subsidies, forced technology transfer and non-discrimination compared to state-owned enterprises.

Beijing also agreed in a late concession to making ‘continued and sustained efforts’ to ratify International Labour Organization conventions against the use of forced labour. However, the enforcement mechanisms for holding China to its promises look woolly.

For Beijing, the accord mostly secures existing EU market access rights. These would hamstring Brussels from driving Chinese firms out of some EU market sectors, as Washington has attempted in its domestic markets. However, the one-sided nature of the economic gains in the EU’s favour strongly suggests that China has prioritised geopolitical gains while leaving open plenty of potential pressure points on Brussels outside the agreement should it subsequently need to apply the squeeze.

That would seem to be confirmed by reading between the lines of President Xi Jinping’s pro-forms comments and statement during a video link-up with EU leaders that the agreement will make ‘significant contributions to the building of an open world economy’. It will undoubtedly allow Beijing to reinforce its narrative of market opening and reform.

The agreement’s legal text has still to be finalised and will then need to be ratified by both sides to come into force. Another reason for striking the deal now is to do so before German chancellor, Angela Merkel, a strong supporter of it, leaves office in 2021.

Brussels aims for the deal to take effect in early 2022, leaving plenty of time for the Biden administration to correct the misalignment it perceives the agreement creating. The incoming US national security adviser, Jake Sullivan, has already said that the new US administration ‘would welcome’ early consultations — welcome in the sense of is demanding.

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China Is Also Buying More From US Farmers Because It Needs To

Chart of China's monthly agriculatural imports from the United States, 2017 v 2020

DESPITE HEFTY PURCHASES that could lead to a record year for US food, produce and seafood exporters, China is still behind the pace necessary to meet its ambitious agricultural commitments under the Phase One US-China trade agreement signed in January. 

As of October, China had bought $23 billion of US agricultural products this year, according to a status report on the agreement released jointly by the Office of the US Trade Representative (USTR) and the US Department of Agriculture (USDA). 

As part of the trade deal, China promised to increase its purchases of US agricultural products by $32 billion over two years from a 2017 baseline of $24 billion. That implies an annual run-rate of $40 billion.

The $23 billion figure includes purchase contracts that have not yet been completed. Actual imports in the first nine months were worth $12.9 billion. They would have needed to have been around $25 billion-27 billion at that point to be on track (although as this Bystander has noted before, Beijing has the full two years to make good on its commitment, so there is time to catch up.)

Intriguingly, the US report puts a favourable spin of China’s performance, by calculating China is at the more creditable level of 71% of target for 2020, a number it has arrived at by taking into account that the agreement did not come into force until mid-February. For the Trump administration, that approach also puts a gloss of success on a deal that has been a political headliner for the president.

The US report also notes, probably more importantly, that Beijing has implemented 50 of the 57 commitments with deadlines that it made to reduce and eliminate structural, non-tariff barriers to US agriculture in China’s market. 

A lot of the market-opening measures are the quotidian work of trade negotiators down in the weeds of the six-digit level of trade classifications, such as lifting restrictions on US almond meal pellets and cubes and expanding the list of ports through which processed meat may enter China. Some of it is, frankly, cosmetic, such as the ending of the four-year ban on poultry imports because of avian ‘flu concerns that was wrapped into the agreement but would probably have happened regardless. 

Nonetheless, the latter has given US poultry farmers $436 million in sales in the first eight months of this year, and the cumulative impact of the changes to import rules and regulations will most likely have longer-lasting benefits for US farmers than the headline-grabbing target of two years of additional exports.

Sales of US corn, sorghum, soybeans, beef and pork have been strong, pointing to record years for several of those categories. That is in part because of the market opening measures of the agreement, and in part for reasons of domestic Chinese demand. Swine ‘flu decimated domestic herds, creating a massive shortage of pork. Food crops, especially cereals, have been hit by a bad year for flooding, drought and insect infestation. This year China needs larger than usual imports of corn and soy for animal feed, as well as more beef to satisfy the appetite of a growing middle-class that can afford and wants to eat more meat.

China’s diminishing ability to feed itself has been a long-standing concern. Urbanisation and desertification have reduced its arable hectarage to close to levels at which the country cannot grow all the food it needs to sustain itself. For many years, China has been securing foreign feedstocks, produce and farmland

President Xi Jinping recently warned that China must maintain what he called a sense of crisis about food security, which may be overegging the pudding. It is a concern, not a crisis. The country has made steady gains in raising yields from shrinking hectarage and maintains a high degree of food self-sufficiency.

However, the number of mouths to be fed is not getting smaller. Nor are expectations of richer and more varied diets diminishing, requiring ever more animal feed for Chinese farmers to produce the meat and dairy products to satisfy growing demand in the affluent cities. 

Higher agricultural productivity as well as crop yields will be critical. Last week’s Plenum communique notably highlighted developing agribusiness and reforming the rural economy as objectives of the next five-year plan and the longer-term goals to 2035. For now, foreign imports will be need in some volume. US farmers can be relieved that creating a US-free food supply chain is not yet at least the national priority that it is with technology.

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China’s Trade Gets Ahead Of The Economy

Chart of percentage change year-on-year of China's monthly imports and exports. Graphic: China Bystander

THE LATEST MONTHLY trade figures are a bit of a mixed bag when it comes to drawing broader lessons from them. As our chart above shows, the import and export numbers have different tales to tell.

China’s exports jumped a larger-than-expected 9.5% year-on-year in dollar terms in August, the third successive month of increase and the highest rise this year to date.

Given that most of Chinese exporters’ markets are still in Covid-19-induced recession, it is highly unlikely that global demand rose by anything like the same amount so that pace would be unsustainable until world trade normalises. Backlogs and suppressed demand are more likely the cause of the current uplift. Exports of medical supplies, including personal protective equipment, and electronics goods needed for working at home were also notably up.

China’s trade surplus with the United States rose to $34.2 billion in August, its highest level since November 2018, despite the US-China Phase One trade deal signed in January intended to reduce the surplus. The agreement calls for China to buy $200 billion of US goods and services in 2020-21 over and above 2017’s levels.

The Petersen Institute for International Economics tracker shows imports from the United States running well below the levels needed to be on track with the commitment. It counted, as of July, US exports to China of the products covered by the agreement worth $48.5 billion this year, compared with a prorated year-to-date target of $100.7 billion.

The 1.8% rise in US imports in August will not take much of a bite out of that gap. The target, however, is not annual but covers two years, so there is time for Beijing to catch-up — or perhaps change the terms of the deal with a new US administration, should November’s US presidential elections produce one.

Imports overall in August, fell by 2.1% in dollar terms, confirming earlier data that domestic demand remains weak. State-supported industry benefitting from stimulus measures is driving the recovery. That has yet to work through to retail consumption.

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Trade Review Restores Glimmer Of Light To US-China Relations

THE POSTPONED FIRST biannual high-level progress review of the US-China Phase One Trade Deal signed in January has been held. Vice Premier Liu He and US Treasury Secretary Steven Mnuchin and Trade Representative Robert Lighthizer convened by video conference today (Monday evening in Washington), a little over a week late.

The subsequent public pronouncements were terse, ‘name, rank and serial number’ affairs that gave little away beyond agenda items to be expected:

The parties addressed steps that China has taken to effectuate structural changes called for by the Agreement that will ensure greater protection for intellectual property rights, remove impediments to American companies in the areas of financial services and agriculture, and eliminate forced technology transfer.

The four-sentence statement issued by Lighthizer’s office concluded:

Both sides see progress and are committed to taking the steps necessary to ensure the success of the Agreement.

That is about as diplomatically anodyne as you can get, but it seemed positively Pollyannaish given the overall dismal state of relations between the two countries.

Beyond the necessary box-ticking on the market access issues, there were indications of large purchases of US agricultural products and energy to come as China’s is behind the pace in meeting the deal’s ambitious target of importing by end-2021 an additional $200 billion worth of US goods above 2017’s levels.

No public mention of any discussion on the far more contentious issues around Huawei, TikTok and WeChat, however.

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US-China Trade Deal Burns Less Brightly

THE UNITED STATES called off the bilateral trade talks that were scheduled for this past weekend, US President Donald Trump says, because he did not “want to talk to China right now”.

The talks were the first slated of the routine top-level biannual status reviews of the US-China Phase One Trade Deal signed in January, but Beijing reportedly wanted to include the Trump administration’s orders prospectively banning TikTok and WeChat in the United States.

The planned video conference call between Vice Premier Liu He and US Treasury Secretary Steven Mnuchin and Trade Representative Robert Lighthizer would also have taken place immediately ahead of the United States announcing further punitive restrictions on Huawei Technologies.

That would have made ‘right now’ particularly awkward. The video call has been postponed indefinitely.

So far, China has continued to display restraint in response, as it has done in the face of repeated provocations by Washington. The foreign ministry’s spokesperson has said there would be more information on the talks in due course.

A collapse of the trade deal would snuff out what is just about the only glimmer of light in the relationship. This became much darker with the new export control measures announced on Monday designed to cut off Huawei’s supply of semiconductors.

The US president’s response to whether he would pull the United States out of the trade deal was, “we’ll see what happens”. Scarcely reassuring.

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US-China Trade Deal: Not Much Win-Win; Not Much Loss-Loss

Screen grab or Annex 6.1 of US-China phase one economic and trade agreement, January 2020.

FROM THE SIGNING ceremony and the detailed text, this Bystander takes two overarching points from the new US-China phase one economic and trade agreement.

First, the agreement will work as long as China decides to make it work, and the deal provides a stick for the United States to help Beijing keep its mind resolved. Second, the biggest risk may be that what US President Donald Trump tells himself China has committed to do under the deal is different from what China thinks it has. Or, indeed, based on Trump’s inflation at the signing ceremony of the agreed numbers for Chinese imports of US goods and services over the next two years, what the agreement says.

For all the talk of this being an equal agreement, most of the commitments to action fall on China: the text contains 20 times as many ‘China shall’ as ‘the United States shall’ (h/t to Sinocism for that tidbit). That said, commitments and concessions are not the same, and what concessions there have been on both sides are small, even if China, on balance, made more and still faces tariffs on the majority of its exports to the United States.

However, over two years of intensifying tariffs pressure, Beijing successful resisted US attempts to make fundamental structural changes to its economy, which may be its biggest win of all.

Most notable among the ‘China shalls’ is strengthening its intellectual property protection, including providing better legal remedies to aggrieved foreign companies, and greatly increasing its imports from the US over the next two years.

The latter is largely a question of money and capacity to absorb the imports, plus dismantling non-tariff barriers.  One set that will go immediately pertains to low-risk foodstuffs, which will be able to be imported requiring only US Department of Agriculture health and safety certifications.

The former is the direction that China’s economic reformers are headed regardless as they move the economy up the value chain, resulting in more Chinese companies with intellectual property to protect and brands to defend from counterfeiting and piracy.

The same is true for pharmaceutical and financial-services market opening, and for the commitment not to devalue the currency competitively.  Even in the area of agriculture and food, the changing expectations and appetites of middle-class consumers for a safe, varied and international diet makes 1970s-90s-era protectionism for farmers as outdated as it is in most countries.

In that sense the, new agreement pushes on an open door, at least at the national level. Implementation will be key. Local government can be more recalcitrant and inconsistent, but the new Foreign Investment Law takes that on, as it does another long-standing complaint of foreign businesses, forced technology transfer, now explicitly forbidden.

If we set aside the loopholes, those are two ‘deliverables’ in the new trade agreement already delivered, as are many of the other commitments. That prompts the thought that this is a deal that could have been papered much earlier, saving many months of tariffs-induced pain on both sides.

There is no doubt that there are many cracks through which implementation could fall, intended or otherwise. That is where the stick comes in. Including an enforcement mechanism in the agreement was non-negotiable to the United States.

Part of that is just greater transparency required of China. It will need to provide regular reports of enforcement actions over IP infringements, institute a mandatory 45-day public comment period for all changes to IP rules and regulations, and present by mid-March an ‘action plan’ with deadlines for further IP protections. That will be more sunshine than to which many are accustomed.

But the heart of enforcement will both sides having compliance teams charged with monitoring the other side’s implementation and then resolving any disputes where one side feels the other is falling short.

The text offers little insight into how the monitoring will be done. There will be regular meetings between the staff of the two compliance teams, but points of complaint will likely have to come into each team from companies. That may test some companies’ willingness to put their heads above the parapet.

It will be up to each team to investigate complaints brought against their country. Resolution is to be reached by consensus within set deadlines. If it cannot be achieved, the complaint gets escalated up the chain of command. If it reaches the highest political level (a designated vice premier and the US Trade Representative) still without resolution, the aggrieved party can take punitive actions (e.g., slap on tariffs) without fear of retaliation.

If it believes the other side has acted in bad faith, it can withdraw from the agreement unilaterally. Either side can end the agreement with 60-days written notice. A Trump tweet will be the perennial wild card.

This procedure looks rickety. It has the feel of an effort by the Chinese negotiators to insert as much process into disputes resolution as possible short of denying the Trump administration the ability to restore tariffs unilaterally if the US president takes it into his mind that China is no longer adhering to the agreement. If he can say he can do that, he probably does not care too much about the rest of the details.

The mechanism may get to November this year unscathed. However, it would be a bold Bystander who would bet on it getting through another four years after that, especially if the incumbent US president is re-elected to office.

As has been noted here and widely elsewhere, phase one tackles a limited range of the issues at dispute between the Trump administration and Beijing. Unresolved and probably intractable fundamental differences over China’s state-led economic model, including government support for Chinese enterprises, indigenous technology development under Made in China 2025 and cyber theft, are deferred to Phase Two.

That will start, Trump says, as soon as he visits Beijing soon. However, it is unclear when substantive negotiations will start and even less so when they will conclude, if ever. China is in no hurry on either front.

It may be that the only way forward will be small, issue-specific settlements. It  remains hard to envision a comprehensive phase two acceptable to the United States that would not undermine the Party’s monopoly grip on power, equally unacceptable on the other side.

Meanwhile, one way we shall amuse ourselves is by filling in the blank order grid in the agreement (see screenshot above) for the $200 billion of additional US imports China promises to buy this year and next over and above the baseline level of 2017’s imports, the last year before the tariff wars.

We have the high-level numbers for the four categories, manufactures, energy, agriculture and services, but no details. These are being kept secret to avoid price and supply distortions in the market, it is said. We suspect there is still work being done on the final numbers down in the bowels of the international trade categorisation system at the six-digit level, and on China’s capacity to absorb such an increase in imports over that relatively short time.

One question the text of the deal has answered, however, is on how the agricultural imports numbers will be got to add up to their targets. The answer is that ethanol purchases will count under agriculture. US ethanol is produced from corn.

China, too, converts some of its corn stockpiles into the fuel. Like their US counterparts, Chinese farmers will now have to start making calculations about how much acreage to plant in the light of the import targets and how much to devote to soy in the face of falling demand for soy meal for hog feed because of the African swine fever epidemic. Such are the real calculations of trade wars.

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