The first chapter of the U.S.-China trade war, which has dragged on for nearly two years, closed yesterday as President Donald Trump and China’s Vice Premier Liu He signed a trade agreement optimistically dubbed “Phase One.”
“This is the biggest deal anybody has ever seen,” Trump said, addressing the audience of 200 delegates invited to witness the agreement being signed. His counterpart, Liu He, offered a more reserved description, calling the deal “an extensive agreement.”
The 94-page document addresses intellectual property, forced tech transfers, and theft of trade secrets, which are the core issues that prompted Trump to first investigate imposing steep tariffs on Chinese goods in March 2018.
However, the more concrete details of the deal revolve around commitments made by China to purchase $200 billion more of U.S. goods and services than it did in 2017—a promise not many analysts are convinced China can keep.
“The targets for increases in China’s imports from the U.S. appear to be unrealistically high, which could set up the deal to fail, leading to additional tariffs or even a full-blown trade war,” said Andy Rothman, investment strategist at Matthews Asia, in a note sent to Fortune after the deal was signed.
China’s shopping list
According to the agreement, the first $76.7 billion of additional purchases will be completed this year, with the remaining $123.3 billion acquired in 2021. The majority of China’s increased purchases will come from the industrial sector, while agriculture, energy and services make up the remainder.
Trump, who has a core support base among U.S. farmers, had pressured Beijing to increase its agricultural imports specifically. In November last year, Trump said that China would purchase an additional $50 billion worth of U.S. agricultural products. According to the signed agreement, China has committed to purchasing just $32 billion more and will “strive” to add a further $10 billion.
A potential $42 billion increase in farm sales is a significant step up from pre-trade war levels. In 2017, Chinese buyers imported $19.6 billion of U.S. agricultural goods. That value plummeted to $9.3 billion in 2018 as Chinese businesses opened new trading routes with other countries. Brazil became a new favorite for soybeans—a product that previously accounted for 52% of all U.S. agricultural exports to China—with exports to China surging 30% in 2018.
Darin Friedrichs, senior Asia commodity analyst at INTL FCStone in Shanghai, is sceptical that the Phase One deal will result in Chinese importers switching back to purchase U.S. soy. “Private Chinese companies had to start booking out of Brazil a few months ago, and can’t easily just walk away from those contracts,” Friedrichs said.
Perhaps more importantly, Friedrichs adds, the Chinese government actually has little control over soybean imports. That particular industry is led by private companies, which are driven primarily by price and, notably, the Phase One deal doesn’t obligate Beijing to eliminate any of the $185 billion worth of tariffs it had imposed on U.S. imports.
Assuming Beijing keeps its tariffs in place to act as leverage during Phase Two negotiations, U.S. goods will continue to cost a premium in China. “Obviously, China won’t slap random tariff on Brazilian products, so I think they’re limited in how much control they can exert to get companies to switch over,” Friedrichs said.
A state-owned solution
If private companies continue to abide by market forces, it may be up to state-owned enterprises to step up and fulfill Beijing’s purchasing commitments in the years ahead as—contrary to belief—the government is unlikely able to exert control over private enterprises’ purchasing decisions, according to Jon Cowley, a Hong Kong-based expert on international trade at global law firm Baker McKenzie.
“To meet its $77 billion commitment in 2020 suggests China will have to start buying products now so I think we’ll learn relatively soon which companies are placing orders. That will be quite telling about how Beijing intends to meet its commitments of the Phase One trade deal,” Cowley said.
The National Farmers Union (NFU) in the U.S. is doubtful Beijing will come through. In a statement online, NFU President Roger Johnson said that “given the numerous deals that have been reached and then breached in the past two years” the union remains skeptical; without more “concrete details” it is worried that “all of this pain might not have been worth it.”
Cowley suggests that’s a common sentiment. “A lot of companies are working their way through this 94-page legal and economic novel only to come to the end and find out that for them the trade war is still alive and well. They are still paying the tariffs they were paying yesterday.”
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