Why the US-China Phase One Trade Deal was doomed to disappoint

As 2021 trade data becomes available, it is clear that trade volumes pledged under the US-China Phase One Trade Agreement were underdelivered. Estimates are that China bought only 57% of the target and China’s imports from the US did not exceed pre-trade war levels.

On the contrary to former US President Donald Trump’s hope to narrow trade deficit with China, the figure widened more than 14% year on year in 2021 to US$355 billion, the highest since 2018.

According to numbers compiled by the Peterson Institute, agriculture was an area that China actual came close to fulfilling the goals, and imports reached 83% of the trade deal commitments.

Much of the shortfall was due to soybeans, which represents the largest trade value by dollars but only reached 66% of the target.

State-owned companies play a major role in importing feed grains such as corn and wheat, but for soybeans, the trade is mostly in the hands of private companies.

It is almost impossible to compel the large private international crushers to buy more US soybeans if there is no need or margins are not desirable. Ultimately, those companies looked at economic factors like feed demand, ocean freight, and cash basis levels and ended up buying soybeans from other origins like Brazil or Argentina if they were more economical.

There were some bright spots in the trade over the past two years. Corn imports were 1176% of the target, followed by significantly stronger pork (303%), wheat (110%), and sorghum (102%) imports.

In agriculture, part of the issue was with how aggressive the initial targets were. Even when they were initially released, they seemed unlikely to be reached.

China’s imports of both products for animal feed and meat had to grow substantially, and unless there is a dramatic increase in food consumption in China, it would have been difficult to hit those goals.

While the trade value did not reach the expected goals, there were still improvements in structural factors such as opening the Chinese market to more US beef and improving the approval and inspection processes for US exporters.

There are new areas of trade contentions not mentioned in the original deal. For example, China’s coronavirus testing of imported cold-chain products and suspensions of exporting companies whose products test positive.

The trade deal also had China pledging to increase the amount of import quotas it used for corn and wheat. However, this did not address the US’ concerns about the role of the state-owned firms in trade and importing.

Despite that wheat imports surged, 90% of those quotas are allocated to state-owned firms. China also imported huge amounts of US corn. But those imports were mainly bought by state-owned firms that bypassed the quota altogether.

The end result was that although China imported dramatically more corn, state-owned companies now represent and even large percentage of China’s corn imports.

The future of US-China trade deals remains uncertain. The US administration has urged China to fulfil its commitment to buy $200 billion of US goods.

However, a year into the Biden administration, there is no clear US-China trade policy. The US is also experiencing the highest inflation in 40 years, so pressuring China to import more US products to fulfil the previous administration’s goals ahead of upcoming mid-term elections might not be politically palatable.

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