U.S. and China Enter Into A Two Phased Agreement

The US and China are the two largest economies in the world and over the past year they have imposed billions of dollars’ worth of tariffs on each other’s goods. So far, the US has imposed tariffs on more than $360 billion of Chinese goods forcing the Chinese to retaliate with tariffs on more than $110 billion of US products. (BBC). This post provides an overview of the most recent activities in the trade war between the U.S. and China, and an analysis of any implications these new tariffs have for the US, Chinese, and Global Economy. 

In 2019, China’s imports dropped $59 billion while American imports fell $42 billion. (Josh Zumbrun, Feliz Solomon, Jeffry Lewis, WSJ). On January 15, after nearly two years of negotiations and damaging tariffs, the US and China have signed phase one of a two phased trade deal. (Michelle Toh, CNN Business). Is the trade war finally coming to an end? 

The agreement stipulates that over the next two years China will purchase an additional $200 billion worth of US goods and services. (Id.) The parties agreed that the increase in purchases will be compared to the 2017 levels, before the trade war began. (Id.) In exchange, the US will reduce tariffs on $120 billion in Chinese products, from 15% to 7.5%. (Id.) Overall, the increase in Chinese purchases would increase total US exports to China to over $260 billion in 2020, and approximately $310 billion in 2021. (Id.) 

Broken down, China has agreed to purchase an additional $52.4 billion of energy exports, $32 billion of agricultural commodities, $77.7 billion of manufactured goods and $37.9 billion of services. (Peter Eavis, Alan Rappeport, and Ana Swanson, NY Times). In the first year of the deal, China will purchase an additional $12.5 billion of agriculture goods, then $19.5 billion in the second year. (Donna Borak, CNN). These commitments are to be in addition to the roughly $24 billion in farm purchases that China made in 2017. (Id.) Examples of agricultural products China has agreed to purchase from the US are soybeans, wheat, cotton and pork. (Id.) The increase in agricultural purchases will aid the struggle of the US agricultural industry. In 2019, US farm subsidies reached their highest level in 14 years. (Dan Charles, NPR). Farmers received more than $22 billion in government payments in 2019. (Id.)

On February 6, China’s Ministry of Finance announced that it will cut tariffs on certain US goods from 10% to 5%. (Lingling Wei, WSJ). The announcement indicates that China intends to implement the agreement despite the coronavirus outbreak which has caused a near-standstill in economic activity in China. (Id.)

The enforcement of this agreement is a hot topic for debate. One of the tactics the US will use to enforce this agreement is a favorite tool used by the current administration – tariffs. (David Lawder, Reuters). The US has stated that it will impose tariffs in proportion to damage caused by any non-compliance. (Id.) However, the US must walk a fine line as the agreement does not include provisions that allow for the appeal or levying of the retaliatory tariffs, meaning that if the offending party disagrees with the retaliatory tariffs, the only recourse is to quit the agreement. (Id.) Terminating the agreement would likely rekindle the trade war. 

As the US-China trade war appears to be at a standstill, the International Monetary Fund predicts global trade growth will improve to about 3 percent in 2020, from an underwhelming 1 percent in 2019. (Josh Zumbrun, Feliz Solomon, Jeffry Lewis, WSJ). Time will only tell if both parties will uphold their sides of the agreement and continue negotiations for phase two.