RaboResearch - Economic Research

Phase One Monitor: September Update. Decoupling taking shape

Economic Comment

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  • Based on July trade data, China has imported USD 115bn of US goods and services covered by the Phase One trade deal
  • China only has five months left to crank up imports of US goods and services covered by the deal by almost USD 100bn in order to reach the 2020 target in the Phase One trade deal
  • This seems unrealistic given that US exports to China have been on a downward instead of an upward trajectory
  • We believe that the Phase One trade deal will break down before the year is out. This could be seen as the next step in a convergence of events that are shaping the decoupling of the US and Chinese economy

Latest release shows China continues to disappoint

On 3 September, U.S. Census Bureau and U.S. Bureau for Economic Analysis (BEA) released the July US trade figures. We use this monthly series as input for our Phase One Monitor (POM), which keeps track of China’s pledge in the Phase One trade deal (which was signed in January 2020) to increase imports of US goods and services by an additional USD 200bn in 2021 (compared to 2017 levels).

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

Figure 1 shows the Phase One Monitor with updated trade data. Up to July 2020, China has imported USD 115bn of US goods and services (annualized) covered by the Phase one trade deal (see the yellow dotted line). But for China to be on track for the annual target of USD 210bn for 2020, the 12-month sum of goods and services exports should have reached USD 175bn in July. This means China already fell short USD 60bn in the first seven months of 2020 – something it has to make up for in the remainder of this year. This comes on top of approximately an additional USD 40bn that China would need to import to stay on track during the coming five months. All in all, China has to crank up imports of US goods and services by almost USD 100bn in five months to reach the 2020 target in the Phase One trade deal. This seems highly unrealistic given that US exports to China have been on a downward instead of an upward trajectory (see yellow dotted line in Figure 1). Of course, the disruption caused by the COVID-19 crisis probably plays a role, but both parties have dismissed the need for adjusting the deal.

Only energy imports are up

China’s disappointing progress towards the 2020 target is broad based. Imports of manufacturing and agricultural goods covered by the Phase One trade deal have not picked up in 2020 (Figure 2 and 3). China’s imports of US services have been declining throughout this year (Figure 5). Only energy imports (Figure 4) have increased as China may have started to stack oil supplies in light of the recent price decline. In spite of this, China is also not on track to meet the energy import target either.

Figure 2: Stable import of manufacturing goods
Figure 2: Stable import of manufacturing goodsSource: RaboResearch calculations based on data from Census, BEA, Macrobond, Office of United States Trade Representative
Figure 3: …as well as agri imports
Figure 3: …as well as agri importsSource: RaboResearch calculations based on data from Census, BEA, Macrobond, Office of United States Trade Representative
Figure 4: China is hoarding energy products
Figure 4: China is hoarding energy productsSource: RaboResearch calculations based on data from Census, BEA, Macrobond, Office of United States Trade Representative
Figure 5: China’s import of American services is on a downward trajectory
Figure 5: China’s import of American services is on a downward trajectorySource: RaboResearch calculations based on data from Census, BEA, Macrobond, Office of United States Trade Representative

What to expect?

Based on the latest trade data, it is becoming more and more apparent that it will be difficult if not impossible for China to reach the import targets that were agreed upon in the Phase One trade deal. Therefore, we believe that the deal will break down before this year is out. This will put additional strain on a rapidly deteriorating relationship between the US and China.

Decoupling taking shape

A breakdown of the Phase One trade deal could be seen as the next step in a in a convergence of events that are shaping the decoupling of the US and Chinese economy. In a speech held on Labor Day, President Trump vowed to further decouple the US economy from China. He emphasized his focus on bringing jobs and supply chains back to US shores – a trend that is already visible in the 2019 trade data. The anti-China strategy of the Trump Administration is by no means restricted to rhetoric alone. The Administration already launched a tech war against China, demanding acquisition of TikTok’s US business by a domestic firm, banning Huawei from participating in its 5G networks and excluding Chinese apps (such as WeChat). In addition, the US introduced sanctions on 24 Chinese firms responsible for construction in the South China Sea. China responded to these actions with tighter regulations related to technological exports, barred several US journalists from China and closed the US consulate in Chengdu.

A Biden win won’t help China

Figure 6: Both Trump and Biden voters dislike China
Figure 6: Both Trump and Biden voters dislike ChinaSource: Pew Research

Despite Trump being more vocal in his condemnation of China, it seems unlikely that a Biden win will alleviate political pressure on China. If Biden wins, Trump will likely attempt to make China’s life as tough as possible during his final months in office. Moreover, Biden recently toughened his stance towards China and even called President Xi Jingping a “thug”. He cannot afford to go soft on China as views of the general US public towards China have become increasingly negative. In fact, the percentage of people having an unfavorable opinion of China has been growing among both Republicans and Democrats (Figure 6).

China adopts ‘dual circulation’

At the same time, we are seeing indications that China is pursuing an active decoupling strategy as well, as it wants to protect itself against foreign pressures. The clearest sign can be found in a recent speech by President Xi Jinping, where he mentions China’s new strategy of ‘dual circulation'. This encompasses an increased focus on the Chinese domestic market and less reliance on exports. Because China is still reliant on US technology, it will probably not initiate any flare-up in tensions. Instead, it will, for the time being, prefer to keep up the game of tit-for-tat.

But with China determined to follow its plan towards self-sufficiency, it will probably not go to great lengths – at least not far enough in the eyes of the US government – to avoid a breakdown of the Phase One deal and a potential reinstatement of US tariffs. Moreover, both potential US presidential candidates appear eager to demonstrate their firm stance towards China. A breakdown of the Phase One deal seems the next step in that direction, especially since the disappointing progress towards the agreed import targets in the deal provides the necessary justification.

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