RaboResearch - Economic Research

Phase One Monitor (POM): Keeping track of China's import pledge in the Phase One trade deal

Special

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  • In this new Phase One Monitor (POM) we track progress toward the target values set for US exports to China in 2020 and 2021 which were agreed upon in the Phase One trade deal
  • Based on the most recent data, which is available up to and including April 2020, we find that China has imported USD 122bn worth of goods and services in the last 12 months
  • The 12-month sum of goods and services exports should have reached USD 155bn in April for China to be on track toward the annual target of USD 210bn agreed for 2020
  • So there is already a shortfall of over USD 30bn of goods and services imports, which China must make up for in the remaining months of 2020
  • For none of the four product groups do we see the upward trend that would indicate that China is actively pursuing a trade strategy aimed at reaching the targets set in the Phase One trade deal
  • We expect the Phase One trade deal to break down before the year is out, given the unrealistically high import targets, the underwhelming progress toward the targets as well as rising diplomatic tensions between the two economic superpowers

Phase One Monitor (POM)

In this Special we present our new Phase One Monitor (POM). It uses monthly trade data to keep track of China’s pledge to increase imports of US goods and services by an additional USD 200bn in 2021 (compared to 2017 levels). This import agreement is part of the Phase One trade deal that was struck between China and the US at the beginning of the year. POM is inspired by work by the Peterson Institute of International Economics (PIIE). However, our monitor adds three important features:

  1. We place the target values for US exports to China into historical perspective, which not only highlights the ambitious target set in the Phase One trade deal, but allows us to examine the trend of China’s imports trajectory going forward;
  2. We also include US services exports to China, something which is also part of the targets agreed upon in the Phase One trade deal;
  3. We focus not only on 2020, but also visualize the progress toward the 2021 target.

For more information on the methodology of POM, we refer to Box 1. A quick refresher on the terms of the Phase One deal is provided in the chapter 'A reminder: the Phase One trade deal'.

Where does China stand?

Figure 1 shows the results of our analysis. For 2020, China and the United States agreed to a goods and services import target of USD 210bn in total, consisting of 83bn manufactured goods, 33bn agricultural goods, 26bn energy goods and 68bn services. For 2021, the target is set even higher at USD 320bn (128bn manufactured goods; 53bn agri; 60bn energy; 80bn services).

To assess whether China is on track to meet these annual targets, we compare a 12-month moving sum of US exports to China to an interpolated trajectory toward the targets. Based on the most recent data, which is available up to and including April 2020, we find that China has imported USD 122bn worth of goods and services covered by the deal in the last 12 months (see the last-plotted yellow dot in Figure 1).

Figure 1: Phase One Monitor
Figure 1: Phase One MonitorNote: Monthly data is annualized by using a 12-monthly moving sum
Source: RaboResearch calculations based on data from Census, BEA, Macrobond, Office of United States Trade Representative

But for China to be on track toward the annual target of 210bn for 2020, the 12-month sum of goods and services exports should have reached 155bn in April. Hence, China already falls short 30bn of goods and services imports compared to our interpolated trajectory, something it would have to make up for in the remaining months to achieve the 2020 target.  

Box 1: Methodology of the Phase One Monitor

In the Phase One trade deal, targets for roughly 60% of all US export to China have been set (Figure 2). This means that not all additional purchases of US goods and services by China count as progress toward the target and that China has to purchase extra goods produced in specific subsectors of manufacturing, energy and agriculture.

Figure 2: Targets for only 60% of all US export to China have been met
Figure 2: Targets for only 60% of all US export to China have been metSource: RaboResearch calculations based on Macrobond, US Census, Office of United States Trade Representative

We have collected monthly Census data on US exports to China for all HS codes specified in the Phase One trade deal. For services, we assume that all additional purchases of US services count as progress toward the target, as 99% of services sectors are covered by the deal. Data for services exports from the US to China are not available on a monthly basis. Therefore, we multiply monthly Census data on total US services exports by the proportion of services exports going to China, observed in the last quarterly data release. We have extrapolated the downward trend of this proportion observed in recent years (Figure 3).

Figure 3: We assume a declining share of US services exports to China
Figure 3: We assume a declining share of US services exports to ChinaSource: calculations RaboResearch based on Census and BEA

We present the actual data releases as an annual moving sum (sum of the last 12 monthly releases), which allows us to put the annual target as well as the progress toward this target into historical perspective. The actual data releases are compared to a linear interpolation between US exports to China in 2019 and the annual targets set for 2020 and 2021. China lives up to its commitment to purchase more US exports if the moving sum converges toward the target value by the end of 2020 and 2021. 


Zooming in on the product groups

When we zoom in on the targets for specific product groups set out in the Phase One trade deal (Figures 4 to 8), we find that US exports to China underwhelm for all groups in 2020. While US exports of manufactured goods, agri and energy products were more or less stable, services exports to China are actually on a downward trajectory. For none of the four product groups do we see the upward trend that would indicate that China is actively pursuing a trade strategy aimed at reaching the targets set in the Phase One trade deal.

That said, one could consider the fallout from the COVID-19 outbreak as mitigating circumstances. The lockdown measures imposed in both countries could have seriously impeded China’s ability to ramp up purchases of US goods and services. Nevertheless, the gap between the realisations so far and our interpolated path toward the target looks too large for this to be the sole reason for China being behind schedule. Moreover, both countries have agreed to keep the trade deal in place, despite disruptive effects of COVID-19 on global trade.

Figure 4: China’s import of manufacturing goods underwhelms…
Figure 4: China’s import of manufacturing goods underwhelms…Source: RaboResearch calculations based on data from Census, BEA, Macrobond, Office of United States Trade Representative
Figure 5: …and so do agri imports
Figure 5: …and so do agri importsSource: RaboResearch calculations based on data from Census, BEA, Macrobond, Office of United States Trade Representative
Figure 6: US export of energy products needs a significant push
Figure 6: US export of energy products needs a significant pushSource: RaboResearch calculations based on data from Census, BEA, Macrobond, Office of United States Trade Representative
Figure 7: US services export is on a downward trajectory
Figure 7: US services export is on a downward trajectorySource: RaboResearch calculations based on data from Census, BEA, Macrobond, Office of United States Trade Representative

A reminder: the Phase One trade deal

In this final section, we recapitulate what was agreed on in the Phase One trade deal. China has pledged to respect intellectual property, reduce its trade surplus with the US and will open its financial markets to foreign parties (also see this Special). In exchange, the US refrained from imposing higher tariffs on new packages of Chinese imports and halved tariffs of 15% on USD 120 billion of goods to 7.5%. But the US tariffs on USD 370 billion worth of Chinese goods remain in force (see Figure 8).

China’s 200bn import pledge and potential fallout

The key item that stands out in the deal is China’s pledge to import an additional USD 200 billion worth of US goods and services by 2021 (compared to 2017 levels). Despite COVID-19 ravaging the global economy[1], both countries have agreed to stick to their end of the bargain.

Ultimately, we expect the Phase One trade deal to break down before the year is out, given the unrealistically high import targets, the underwhelming progress towards the targets as well as rising diplomatic tensions between the two economic superpowers. Early May President Trump already said that he would terminate the deal if China fails to prop up its purchase of American goods and services to meet the targets in the deal.

Figure 8: Timeline of the trade war
Figure 8: Timeline of the trade warSource: RaboResearch, Census
 

Footnote
[1] The Phase One deal contains a section (Article 7.6) stating that in the event of disasters, parties shall consult with each other.

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