The China-U.S. Phase One Agreement signed in Jan marked an uneasy truce between the two countries, though it did not last long as tensions intensified in many other aspects. Nonetheless, before the two sides officially talk again, it’s necessary to revisit the progress of Phase One Deal execution in time of COVID-19, in particular, trade expansion, before any judgement is made.
- Revisiting Phase One Deal - ambitious targets of trade expansion are set, among which China is to purchase an additional amount of no less than US$200bn U.S. goods and services in 2020-21 on top of 2017 amounts. Categories of goods include manufactured goods, agriculture and energy products. Even before COVID-19, such goal is considered ambitious, implying 79% increase of U.S. exports to China in 2020 compared to 2017.
- How much of the target has been achieved now? Our calculation finds that by the end of 1H20, China’s purchase of U.S. goods achieved 22.9% of the 2020 target as specified in Phase One Agreement. For manufactured goods, agriculture and energy products, hit rate of their 2020 Phase One target was 28.3%, 19.2% and 10.9%, respectively.
- Severe COVID-19 impact in 1Q20. Exports of U.S. goods specified in the Agreement declined 9% in 1Q as a result of global economic shutdown, supply chain disruption and demand stagnation…but followed by sequential improvement in 2Q. U.S. goods exports to China increased 12.6% YoY in 2Q, pegging growth in 1H20 at 2.1% YoY. A detailed analysis of 18 subcategories of U.S. goods exports to China shows that the majority of goods experienced significant acceleration or narrowing of decline in 2Q.
- We believe China has been sincerely making efforts to accomplished the trade deal in time of COVID-19, which is bolstered not only by sequential increase in the purchase of U.S. goods in 2Q and onward (immediately after COVID-19 was largely contained domestically), but also by the fact that China’s purchase of major categories goods, such as LNG, crude oil and meat achieved breakthroughs in 1H20.
- What to expect next? To one’s best wish, U.S. and China should sit down and talk about revising or postponing the Phase One targets, which now seems unattainable under the circumstance of COVID-19 inflicting on global trade and economy (to achieve the 2020 target requires U.S. goods exports to China to increase ~200% YoY in 2H20). However, as the U.S. Election approaches, it is not hard to believe that China-U.S. tensions may intensify and deviations from economic and business rationale may well continue.