Is the U.S.-China “Phase One” Trade Deal Working?

Last week, the Office of the U.S. Trade Representative (USTR) and the U.S. Department of Agriculture (USDA) issued a report on the implementation of the agriculture provisions in the U.S.-China Phase One Economic and Trade Agreement, claiming that the deal “is delivering historic results for American agriculture.” Are they right about these results? Chad Bown of the Peterson Institute looked at the numbers, and found otherwise:

Despite a recent report from the Trump administration suggesting otherwise, US farm exports to China have not yet kept up with the phase one commitments. Though better than manufacturing, it took until September for farm exports to reach pre‐​trade war levels again … . Through September, they stood at only 65 percent of their seasonally adjusted targets.

Manufacturing and energy exports to China did even worse.

How does the Trump administration justify its claims? To some extent, it may be due to certain products for which China has promised to make purchases, but for which there have not been actual exports under these commitments yet. These promises may or may not actually come through (more on that later), but the existence of these promised sales can be used to make the data look more positive than it actually is.

It also may be that for some products, there actually have been increases in exports, for one reason or another. Let’s take a look at one of those, beef, which is a product we’ve been following for a while now. The USTR/USDA report says the following about beef:

U.S. beef exports to China have tripled.

The Phase One Agreement eliminated many longstanding structural barriers that hampered access for U.S. beef to China. As a result, 2020 exports of U.S. beef and beef products to China through August are up 118 percent compared to the same period in 2019 and are already more than triple the total for U.S. beef exports to China in all of 2017. In addition, as of October 8, 2020, total accumulated beef sales to China in 2020 were over 25 times greater than those accumulated over the same period in 2017.

They are not necessarily wrong, but there’s more to the story. As we’ve explained in our prior examination of this issue, U.S. beef exports to China have gone up a bit in recent years, but they are still far less that what is exported to China by other countries. Here is some data on Chinese beef imports from 2016 to 2019, broken down by country:

So yes, U.S. beef exports to China have been increasing, but they aren’t making much of a dent in the market relative to other countries’ exports.

It may also be important to note the difference between “exports” and “sales.” The report says that beef “exports” are up 118 percent compared to 2019. It then notes that “accumulated beef sales to China in 2020 were over 25 times greater than those accumulated over the same period in 2017.” But sales are not necessarily the same thing as exports, as purchase commitments don’t always come through. Here’s an illustration from a recent Washington Post story:

The deal seemed like great news for Montana ranchers: Chinese retailer JD​.com had promised to buy $200 million worth of beef and spend an additional $100 million building a slaughterhouse in the state.

But nearly three years after the accord was announced on the sidelines of President Trump’s first official trip to Beijing, the big orders have yet to materialize and there’s no sign of any new meatpacking plant.

…

Many of the deals, including JD.com’s, were nonbinding memorandums rather than legally enforceable contracts. Under its agreement, JD​.com pledged to import a total of $200 million in Montana beef from companies belonging to the Montana Stockgrowers Association (MSGA) for online sales to Chinese consumers.

JD​.com officials were enthusiastic about the deal as it came together, seeing it as offering a competitive edge over Alibaba, said James Green, who was the senior trade official at the U.S. Embassy in Beijing at the time.

“But by a couple of weeks afterward, they literally were not answering phone calls from the embassy. It seemed pretty clear this was a figment of someone’s imagination or was maybe an aspirational deal,” Green said. “They were not that serious about the specifics of it.”

As time goes on, we will have a clearer sense of just how much U.S. exports of manufactured goods, agriculture, energy and services to China actually increased. As of right now, though, it does not look like the numbers will match what was promised in the phase one deal. 

The phase one deal’s reliance on massive purchase commitments by China may be its biggest flaw. These commitments often generate press releases about the big sales to come, but the deal did not do enough on what was really needed: Lower tariffs and other trade barriers to allow producers to compete in the Chinese market. If trade liberalization had been the focus of the deal, rather than just the smaller part that it was, the long‐​term results might have been better.