• U.S. AND CHINA REACH INTERIM PHASE ONE TRADE DEAL

    18 December 2019

    On December 13, the U.S. and China announced that both sides have reached an interim Phase One trade deal that will mutually reduce some tariffs on U.S. and Chinese imports and boost Chinese purchases of U.S. agricultural, energy and manufactured goods. The reported 86-page limited trade agreement consists of nine chapters covering issues ranging from forced technology transfers, intellectual property practices, dispute resolution mechanisms, exchange rate and currency, and “expanding trade” on Chinese commitments to import various U.S. goods.

    The specific text agreement has not been officially released and still subject to final translation with Beijing electing not to publicly confirm some of Washington’s key accounts from the agreement (most notably on the exact scale of Chinese purchases of U.S. agricultural imports). Beijing has largely stopped short of publicly committing to hard targets but stated that it would be importing more U.S. wheat, rice, corn, energy and pharmaceutical products.

    Neither the U.S. or China have confirmed when both sides will kick off Phase Two trade talks, which comes in contrast to U.S. President Donald Trump’s earlier claims that second phase negotiations would commence immediately. U.S. Trade Representative (USTR) Robert Lighthizer cited that the fate of a Phase Two deal would also be partly determined by how Phase One is being enforced and implemented.

    TARIFF DETENTE

    After President Trump declared over Twitter that an agreement had been reached, the U.S. issued an official notice “suspending indefinitely” 15 percent tariffs on USD 160 billion (EUR 143.5 billion) worth of Section 301 List 4B Chinese imports – which included cell phones, laptop computers, toys, and clothing goods – that were previously set to come into effect December 15. Washington will also cut tariffs from 15 to 7.5 percent on around USD 120 billion (EUR 107.7 billion) worth of List 4A Chinese imports. However, 25 percent tariffs on around USD 250 billion (EUR 224.4 billion) worth of Chinese imports (List 1-3) remains unchanged in a move largely seen as providing Washington with leverage heading into the second phase of negotiations next year.

    In exchange, Beijing has suspended additional tariffs of 5 to 10 percent on around USD 75 billion (EUR 67.6 billion) worth of U.S. goods that were set to come into effect on December 15, according to the Customs Tariff Commission of the State Council. China will also suspend tariffs of 25 percent on automobiles and 5 percent on auto parts and components imported from the U.S. According to a USTR Fact Sheet, further concessions from Beijing were also reportedly made to address long-standing concerns over intellectual property, technology transfer practices, and increasing U.S. imports to reduce the trade deficit.

    A major stumbling block is over the extent to which Beijing will be required to increase the level of imports of U.S. products – particularly agricultural goods – as desired by Washington. When asked specifically about President Trump’s claims that China would buy USD 50 billion (EUR 44.8 billion) worth of U.S. agricultural goods in 2020, Chinese officials stated that it would increase the procurement but said that specifics were still being determined. Beijing has previously reiterated that it would need to complete such purchases under market-based principles but would need to undergo a substantial increase as only USD 8.6 billion (EUR 7.7 billion)  worth of agricultural goods were bought last year amid Chinese retaliation against U.S. tariffs.

    OUTLOOK

    Although the recent detente in U.S.-China trade relations could provide the needed momentum to kickstart the second phase of negotiations, existing progress from the current interim deal could very well be derailed on how the first phase is implemented. Should Beijing fail to make purchases it has agreed to, Washington could enact a “snapback provision” that could result in original tariff rates on List 4A and 4B imports being reimposed. It also remains to be seen whether the first phase of the limited trade deal will remain in place long enough to avoid another potential collapse in negotiations heading into the 2020 U.S. Presidential Election.

    From a supply chain perspective, the operational challenges posed by the U.S.-China trade war are therefore mostly unchanged. Irrespective of the recent announcement, the scaling back of some tariffs most likely did not make up for the time that businesses would have needed to make key decisions on production and supply chain issues (such as deciding whether to put containers on ships that would have needed to have been made weeks in advance). The unpredictable nature of the trade negotiations suggests that supply chain professionals will need to execute their contingency plans, identify alternative suppliers, and assess the financial and regulatory risks that suppliers might be facing due to the dispute.

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