Who’s to blame for ‘phase one’ trade deal failure?

The US Census Bureau reported this week that the US goods trade deficit with China rose 14.5% to US$355.3 billion in 2021, despite a “phase one” trade deal’s explicit aim of narrowing America’s deficit with China.

China fulfilled just 57% of its full two-year purchase quotas in the “phase one” trade deal signed between the Trump administration and Chinese authorities in January 2020, according to an analysis of final 2021 Census Bureau trade data compiled by the Washington-based Peterson Institute for International Economics think tank.

Anonymous US officials quoted in media reports said that Washington was losing patience with Beijing, which they claimed had shown no signs of meeting the trade deal’s purchase agreements. The US Trade Representative said the Biden administration was working with Chinese officials to address the matter.

Chinese academics and businesspeople quoted in state media reports said the US is mainly to blame for the “phase one” deal’s failings due to its inability to control spiraling inflation, which they claim is why China failed to meet its commitment to purchase an additional US$200 billion worth of US farm and manufactured goods over the past two years above 2017 levels.

They said the US should lower tariffs on Chinese goods to ease inflationary pressures then Chinese companies would buy more US products. China’s Foreign Ministry, meanwhile, recently said the two sides should resolve their disputes with a spirit of equality and refrain from a trade war, which it said will have no winners.

Since then-US President Donald Trump took office in January 2017, Washington has repeatedly urged Beijing to take concrete measures to reduce the US trade deficit with China, which rose 11.5% to $418.2 billion in 2018 from $375.2 billion in 2017.

In July 2018, the US imposed 25% tariffs on $50 billion worth of Chinese goods. China retaliated by increasing tariffs on $34 billion of US goods including agricultural products, cars and marine products.

In May 2019, the Trump administration increased the tariffs on $200 billion of Chinese goods from 10% to 25% and threatened to impose 25% tariffs on an additional $325 billion of Chinese goods.

The Trump administration’s trade war on China has been continued under Biden. Image: YouTube

 

In January 2020, the US and China signed the “phase one” trade agreement, which requires China to purchase an additional $200 billion worth of US farm and manufactured goods, energy and services above 2017 levels. The Biden administration maintained Trump’s tariffs on Chinese goods last year.

Although the US trade deficit with China contracted to $344.3 billion in 2019 and $310.3 billion in 2020, it rebounded to US$355.3 billion last year, according to US Census Bureau data. Exports of US goods to China grew 21.34% to US$151.1 billion while imports of Chinese goods rose 16.5% to $506.4 billion.

The annual deficit in goods and services increased for a second straight year, widening 26.9% to US$859.1 billion, US Commerce Department data released on Tuesday showed.

Last November, US Trade Representative Katherine Tai said the Biden administration was gaining traction with China in talks over Beijing’s compliance with the “phase one” trade deal. Tai said the US was weighing all of China’s shortcomings in the deal, including its lack of purchases of commercial aircraft.

“It is really clear that the Chinese haven’t met their commitment in Phase 1. That’s something we’re trying to address,” Deputy US Trade Representative Sarah Bianchi said in a virtual forum on February 1.

On Monday, US officials told Reuters that China should take concrete actions to meet its “phase one” commitment, which they said had “not shown real signs” in recent months that it would close the gap in their two-year purchase commitments.

US officials said they would continue to press China to show “serious intent” to reach an agreement on their purchase commitments, but conceded the framework of the deal offered little leverage to enforce the purchase commitments.

“For the specific problems which emerge in economic and trade relations between the two countries, both sides should appropriately solve them in the spirit of mutual respect, equality and consultation,” Zhao Lijian, a Chinese foreign ministry spokesman said in a regular daily media briefing on Monday.

As of last November, China had met 84% of its purchase commitment in US farm products, 58% in manufactured goods and 43% in energy products, Lian Ping, chairman of China Chief Economist Forum, wrote in a recent article.

Lian said China could not significantly boost imports of energy products from the US due to rising logistic costs amid the pandemic. He said the US’s manufacturing sector was hit by the pandemic, inflation, structural unemployment and chip shortage problems, making it difficult for China to buy more aircraft and aerospace parts from the US.

A Boeing manufacturing facility. Photo: Handout

 

High inflation in the US, which hurt the price competitiveness of American goods, was the main reason why China failed to meet its “phase one” commitment, Lian said.

The additional tariffs imposed by the Trump administration on Chinese goods had worsened US inflation and supply chain problems and should be scrapped immediately, especially those on Chinese mechanical equipment and electronic products, he opined.

Lian expected that China’s exports of automobiles, machines, steel products, chemicals and consumer goods to the US would continue to grow this year while China would buy more agricultural and green energy products from the US.

Eddy Li Sau-hung, president of the Hong Kong Economic & Trade Association, said the US government’s stimulus package during the pandemic, together with supply chain bottlenecks, had caused strong inflationary pressures in the US. Li said the price of goods and services in the US rose 7% year-on-year last December and predicted it could hit 7.3% in January.

He said the fact that more than 140 American lawmakers had called on lowering tariffs on Chinese goods showed inflation had seriously hurt Americans’ livelihoods.

On January 20, a bipartisan group of more than 140 US lawmakers called on the Biden administration to immediately revive and expand a tariff exclusion process on Chinese goods to help US manufacturers.

Last October, USTR said it would consider canceling some of the additional tariffs on Chinese goods if lifting them would not impact or cause severe economic harm to US interests.

Author: Jeff Pao, Asia Times

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