Pacific Money | Economy | East Asia

Keep Trade as the Cornerstone of US-China Relations

Despite the “Phase One” deal, U.S.-China total trade is slipping in importance. That’s a warning sign for the bilateral relationship as a whole.

By He Jun for
Keep Trade as the Cornerstone of US-China Relations
Credit: Wikimedia Commons/ Poom!

There are two views in the United States concerning the progress of China’s implementation of the “Phase One” U.S.-China trade agreement. The first is the official position of the U.S. government. The Office of the United States Trade Representative (USTR) and the United States Department of Agriculture (USDA) recently issued a report saying that China has purchased $23 billion worth of American agricultural products and has completed 71 percent of the purchases of agricultural products pledged in the agreement. This figure includes both agricultural products that have been shipped as well as agricultural products that have been sold but not yet exported.

With the continued deterioration of U.S.-China relations, it is rare for U.S. officials to announce positive progress on the trade deal. Since the report was released less than two weeks before the U.S. election, some analysts believe that the report paints an optimistic picture of the U.S.-China trade agreement – more optimistic than the current U.S. export data alone. U.S. President Donald Trump has provided billions of dollars in aid to American farmers who have been hurt by the trade war and the COVID-19 pandemic, and he hoped to obtain overwhelming support in the rural areas of the Midwest agricultural region to help him in getting re-elected. To put it bluntly, announcing that China is actively buying American agricultural products was an attempt to boost the number of Trump votes in the election.

However, this figure has been questioned by some American experts. Former U.S. Department of Agriculture chief economist Joseph Glauber considered the figure to be an overly optimistic measure because some sales may not be shipped until the December 31 deadline, and the agreement may still be cancelled. “The number 71 percent is wishful thinking,” Glauber told Bloomberg. “I think the idea that all of that will occur in 2020 is highly unlikely, just based on previous years’ shipping patterns.”

Based on data released by the U.S. Department of Commerce, Chad Bown of the U.S. think tank Peterson Institute for International Economics estimated that as of September 30, China had spent $59.1 billion to purchase goods covered by the agreement. If the annual procurement target is to be achieved step by step, the purchase amount should have reached $109 billion as of September 30. This means purchases had fallen behind expected levels by nearly $50 billion. Scott Kennedy, a senior adviser at the Center for Strategic and International Studies (CSIS), said that regardless of the category, the procurement trend does not look good, and it will be difficult for China to fulfill its promises.

Bown’s statistics show that as of September, the United States had actually exported $12.9 billion of agricultural products to China; 2020 target is $36.6 billion. In terms of manufactured goods, the United States exported $47.7 billion, while the annual target was $111.2 billion. The gap between energy exports to China and the target is particularly huge. As of September, the U.S. exports were at just $5.3 billion, while the target for this year is $25.3 billion.

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The huge gap between China’s Phase One commitments and actual purchase of American goods is due to certain practical difficulties. First, the outbreak and the spread of the COVID-19 pandemic has led to a decline in domestic demand in China while simultaneously hindering U.S.-China trade and transportation. Second, energy prices plummeted earlier this year, and since the target of trade with China is in U.S. dollars rather than product volumes, China will need larger imports to achieve this target.

But beyond those factors, the difficulty in implementing the first phase of the U.S.-China trade agreement is an indication of the current state of U.S.-China relations. The trade war has been ongoing for more than two years; this coupled with the intensification of U.S.-China geopolitical frictions and the United States’ push for a complete decoupling from China have put to the test the huge and complementary trade relationship between the United States and China.

According to Chinese customs data, the United States has long been China’s second largest trading partner – that is, until 2019. In 2019, China’s imports and exports to the United States were 3.73 trillion renminbi, a year-on-year decrease of 10.7 percent. With that, the United States fell to China’s third largest trading partner. ASEAN now occupies the position as China’s second largest trading partner, with a trade volume of 4.43 trillion RMB, an increase of 14.1 percent year-on-year. China’s trade volume with the EU, its largest trading partner, was 4.86 trillion RMB, an increase of 8 percent.

In 2020, the decline in U.S.-China trade status continues. From January to September this year, the total value of U.S.-China trade increased by 2 percent, eventually reaching 2.82 trillion RMB, accounting for 12.2 percent of the total value of foreign trade. During the same period, China-ASEAN trade totaled 3.38 trillion RMB, an increase of 7.7 percent, accounting for 14 percent of China’s total foreign trade value; China-EU trade totaled 3.23 trillion RMB, an increase of 2.9 percent year-on-year, accounting for about 14 percent of the total foreign trade value.

With the decline in the status of U.S.-China bilateral trade, there is a worrying long-term trend in the relations between the two countries: Trade, which is the cornerstone of bilateral relations, is being eroded. If this process continues, it will seriously weaken the substantial foundation of future U.S.-China relations.

These two major powers have a complex systemic relationship, which encompasses economic and trade relations, as well as diplomacy, politics, culture, science and technology, education, security and military affairs, and a variety of multilateral issues such as global climate change. However, economic and trade relations are the most important aspect of the overall bilateral relationship. These are the areas where the two powers – despite completely different ideologies, political systems, and values – ​​are able to reach the greatest intersection and form common interests. No matter how the geopolitical relationship between the two countries changes, as long as the two countries do not move toward a state of war, the economic and trade relationship will be difficult to be cut off systemically in a short period of time.

The United States has introduced various extreme sanctions against China this year. Researchers from Anbound have noticed that, while hitting Chinese companies, the sanctions are also having a damaging effect on U.S. businesses. Studies estimate that the extreme pressure imposed by the United States on China in the semiconductor field, for instance, may cause tens of billions of dollars in losses to the U.S. semiconductor industry by keeping American companies away from China, the largest semiconductor consumer market.

As U.S.-China relations deteriorate, both countries need to re-examine the costs of their mutual competition. As far as China is concerned, despite being suppressed by the United States, it still has to do its best to maintain and protect the cornerstone of U.S.-China trade. While geopolitical turmoil remains, economic and trade activities will still be tenacious and lasting; therefore bilateral trade should be considered by these two powers from the long-term perspective.

He Jun is partner, director of the China Macro-Economic Research Team, and senior researcher at Anbound Think Tank. His research field covers China’s macro-economy, energy industry and public policy.