By Chris Sevcik, Director of International Trade Services, WTCGP
The US is expected to sign a trade deal with China today. This deal is the first phase of a larger trade deal that is expected at a later date. News of the deal has been well received by markets with the Dow Jones crossing 29,000, an all-time high.
The US-China trade dispute originated as a dispute over intellectual property. Intellectual property is addressed in the phase one deal. China will crackdown on policies concerning forced technology transfer and address other barriers for entry. Enforcement of intellectual property is also included in the phase one deal. Should an issue arise and the US trade representative receives a complaint, it will be adjudicated within 90 days. If the US trade representative does not feel the issue was addressed properly, the US has the right to impose a proportionate response and China has promised that it will not retaliate.
The US-China phase one trade deal will also include the agreement by China to open its financial services sector to US firms. This opening up will account for much of the increase in services to be purchased by China from the US. In this deal, China has also agreed to “refrain from deliberately pushing down its currency to gain a trade advantage.” This will allow US companies to compete on a more level playing field in the Chinese market. With China agreeing to not deliberately adjust its currency, the US has also dropped the currency manipulator label placed on Beijing.
China has also agreed to increase purchases of US goods and services. In the first phase of the trade deal, it has been announced that China has agreed to purchase a roughly $200B in US goods. Of this $200B purchasing agreement, approximately $75B will come from manufactured goods, $50B from energy, $40B from agriculture, and $35B from services. There is discussion, however, regarding how this agreement will become reality.
The increase in manufactured goods will likely come from the purchase of aircraft, autos, and auto parts. With the 737max grounded, however, there may be an issue in aircraft purchases until this issue has been resolved. Most American automotive OEMs have manufacturing bases in China. The most popular vehicles produced in the US and sold in China include SUVs from BMW and Mercedes. With limited supply, it is questioned how increases will be forthcoming.
There are several roadblocks that may impact the effectiveness of this agreement. The auto industry in China has cooled off in recent years. China car sales are down and excess domestic capacity is rising. This, combined with no changes on high tariffs placed on US-made autos, procurement rules favoring Chinese manufacturers or subsidies to Chinese state-owned enterprises, means that increasing the sale of US-made autos remains in question.
There has been discussion regarding China’s demand for increased agricultural products. In 2017, China spent $24B on US farm goods. Is China’s demand for US farm goods nearly double today as it was two years ago? Experts are skeptical and with the recent strong increase of purchases of soybeans from Brazil by China in the past week, skepticism remains high.
China economy has slowed in recent years. As its economy slows, demand for energy decreases. Energy analysts are questioning if China will have the need to purchase an additional $50B in energy products. Sourcing for crude oil, liquefied natural gas and liquefied petroleum gas (LPG) has been established and it is unlikely that a large increase in energy products will be required soon.
The slowdown in China’s economy may not impact all sectors exporting from the US. China recently has reduced tariffs, issued rate cuts to fuel lending, and has “called on local governments to ‘go to all lengths’ to prevent massive job losses.” In the short-term, if the Chinese economy is pushed into a ballooning scenario, imports will be required from multiple sectors to continue pushing out products. Imports will also be required as the domestic population continues to consume. In the long term, however, this will not be sustainable.
Phase one of the US-China trade deal still has several hurdles to cross, but with the inclusion of intellectual property protection, the opening up of the financial sector, and the agreement to increase purchasing of US goods and services, many companies will find doing business in China much easier.