On October 11, U.S. President Donald Trump announced that a “very substantive phase one” trade deal had been reached with China which reportedly included unspecified concessions in intellectual property, exchange rates, financial services, and an agreement to purchase USD 40-50 billion (EUR 36.3-45.3 billion) worth of agricultural products. In exchange, the U.S. has agreed to suspend a planned tariff increase from 25 to 30 percent on USD 200 billion (EUR 181.2 billion) worth of List 3 Section 301 Chinese imports that were originally scheduled to come into effect on October 15.
Despite President Trump’s assertions, it will take five weeks before the verbal commitments are translated into legal text and further negotiations appear to be necessary to conclude the interim agreement. Chinese state media sources acknowledged that “substantial progress” was made but reiterated that Beijing would like more talks at the end of October before Chinese President Xi Jinping agrees to sign the “phase one” trade deal outlined by U.S. President Trump.
China has also called on the U.S. to scrap another planned tariff hike on December 15 from 10 to 15 percent on USD 300 billion (EUR 272 billion) worth of Section 301 List 4 Chinese imports. To date, U.S. officials have declined to make such a commitment and appear inclined to evaluate how the negotiations go before deciding on whether it will suspend the December 15 tariff increase.
Non-tariff barriers still in play
The U.S.-China trade negotiations were preceded by a series of major non-tariff barriers through the form of export control regulations, sanctions, and other regulatory measures.
The U.S. Commerce Department placed on October 8 an additional 28 Chinese entities including artificial intelligence firms SenseTime Group Ltd and Megvii Technology Ltd.; and video surveillance firms Hikvision and Zhejiang Dahua Technology. Hikvision and Dahua both use supplies from U.S. tech companies such as Intel Corporation, Nvidia Corporation, Ambrella Inc., Western Digital, and Seagate Technology. Under the U.S. Entity List, suppliers are barred from providing technology that originates in the U.S. to Chinese entities that are identified to be without a license. Reports have also similarly surfaced that Beijing’s proposed “Unreliable Entities List” aimed at punishing foreign firms deemed to have harmed Chinese interests was ready, but that the list will be published depending on how the U.S.-China trade talks proceed.
In addition, the U.S. Treasury imposed on September 25 sanctions on six Chinese entities – including two COSCO Shipping subsidiaries – for allegedly knowingly transferring oil from Iran in violation of U.S. sanctions. The sanctions directly impacted 40-50 tankers and have sent global freight rates surging for crude oil from the Middle East to Asia. China’s largest refiner Sinopec announced that it would be reducing operations starting from November due to the surging cost of crude and eroded margins.
Further negotiations expected
The U.S. and China are expected to hold further substantive negotiations leading up to the Asia-Pacific Economic Cooperation (APEC) meeting held in Santiago, Chile on November 16-17. U.S. Treasury Secretary Steven Mnuchin reiterated that a Phase One agreement could be signed, although an additional tariff increase from 10 to 15 percent on USD 300 billion worth (EUR 271.9 billion) of Chinese imports (List 4) was likely if no deal is reached by then. The reported interim trade deal is arguably in line with Beijing’s preference for the negotiations to be staggered in a “40/40/20” format in contrast to President Trump’s preference for a sweeping comprehensive trade deal.
The decision to suspend the tariff increase offers little relief for companies that still need to cope with 25 percent tariffs on USD 200 billion worth of Chinese imports and the extent to which Beijing will actually increase agricultural purchases to USD 40-50 billion remains optimistic at best. Manufacturers with deep supply chain networks in the U.S. and China will need to assess whether alternative suppliers are necessary and evaluate risks posed to sub-tier suppliers in terms of product flow, geographical location, and financial stress.
Customers are advised to continue to monitor Resilience360 for the latest U.S.-China trade war developments and its continued impact on global supply chain networks.