After spending much of 2020 reviewing the legacy of former President Donald Trump's trade war with China, the Biden administration decided to hold China's feet to the fire on at least one important aspect of that confrontation. The administration will continue enforcing the so-called "phase one agreement" that China signed in early 2020, including its commitment to purchases of US goods that it has so far fallen short of fulfilling.
The decision to insist that China live up to the agreement was announced by the United States Trade Representative, Katherine Tai, on October 4, along with the administration's intention to keep in place for the time being US tariffs on hundreds of billions of dollars of imports from China. Anyone looking for a dramatic policy change toward China from the last administration will not find any evidence of it.
In her announcement, Tai said she would soon "discuss with China its performance under the phase one agreement. China made commitments that benefit certain American industries, including agriculture, that we must enforce." One critical part of that deal called for China to purchase an additional $200 billion of not only US agriculture, but also manufacturing, energy, and services exports, by the end of 2021. Enforcement is critical because China is on track to purchase only slightly more than 60 percent of the goods it promised.
Beijing made the $200 billion purchase commitment in the hopes of defusing the trade confrontations with the Trump administration. The phase one agreement also committed China to make progress on enforcing intellectual property rights, remove non-tariff barriers to farm imports, liberalize its financial services sector, and take other steps that will also presumably be part of Tai's discussion. But understanding where China's purchases in 2020 and 2021 fell short, and why, is crucial to any effort to address the US-China trade relationship.
China is not meeting the purchase commitments in the phase one agreement
In January 2020, President Donald Trump signed the US-China phase one agreement. The deal committed China to purchase an additional $200 billion of US goods and services—relative to 2017 levels—with prescribed amounts split across 2020 and 2021. The agreement followed two years of trade war and tariff escalation between the two countries in 2018 and 2019.
Through October 2021, China purchased only 60 percent of the US goods expected at this point for the deal covering the period from January 1, 2020 through December 30, 2021 (figure 1). Put differently, China is cumulatively about $124 billion behind in its expected purchases of US goods so far. US exports to China have resumed after the trade war, but remain only slightly above 2017 levels.
From the agreement's early days, China has never been on pace to meet the goods purchase commitments, but there were several factors at work. The deal's implementation in its first year was marred by the devastating economic impact of the COVID-19 pandemic, with China's economic growth clocking in at only 2.3 percent. (The pre-pandemic forecast was 5.8 percent.) World trade suffered in 2020, falling 12 percent compared to 2019. China's trade fared better than most, with its total imports ending up only 1 percent lower than 2019. But by the December 2020 midpoint, China had bought only 59 percent of the US goods it had committed to buy under the first full year of the agreement (see again figure 1).
China's economy has bounced back stronger in 2021, with recent forecasts putting this year's GDP growth at around 8 percent. However, China's phase one purchase commitments were also back-loaded, with more expansive spending on US exports scheduled for 2021, i.e., more than 50 percent higher than 2020. US exports to China from January through October 2021 alone were up slightly compared to 2020—running at 61 percent of the pro-rated target for 2021 (see Bown 2021, Figure 2). But despite its improving economy, China has not been able to catch up.
US manufacturing exports continue to suffer
US manufacturing exports are the most economically significant component of the phase one agreement, making up 70 percent of covered goods. Yet, US exports of manufactured products were only at 60 percent of the pro-rated target for sales covering January 2020 through October 2021 (figure 2).
The poor performance of manufacturing is driven by major US exports like aircraft and autos. These sectors combined to make up nearly 28 percent of US goods exports covered by the agreement. Their exports to China were shattered in 2018 and 2019. US exports of those products have yet to recover, and without them, China has little hope of meeting the overall purchase commitments.
US aircraft sector exports since January 2020 remain at only 19 percent of prorated sales expected under the phase one commitments. Crashes of the Boeing 737 MAX airplane in late 2018 and 2019 have not helped. The model was grounded globally, Boeing shut down production for nearly five months and, like many buyers, China cancelled orders. Nevertheless, in September 2021, Biden's Commerce Secretary Gina Raimondo pinned some of the blame for the failure to resume sales on the government, declaring: "There's tens of billions of dollars of planes that Chinese airlines want to buy but the Chinese government is standing in the way." US exports to date during the phase one period are $20 billion behind the 2017 pace and $37 billion less than the estimated target. However, aircraft is the one part of the legal text of the agreement that allows credit for "orders and deliveries" (emphasis added)—opening the possibility for China to make up for that shortfall by placing orders before the end of December 2021 for future delivery.
US auto exports to date are also estimated to be more than $18 billion short, reaching only 39 percent of the prorated target. Prior to the trade war, China was the second largest US export market for vehicles. Trump imposed 25 percent tariffs on imported auto parts from China in the summer of 2018, and China immediately retaliated with a 25 percent tariff on car exports from the United States. The resulting cost increase and uncertainty made it difficult for US-assembled cars to compete in the Chinese market. Companies like Tesla (California) and BMW (South Carolina) shifted American-based production destined for China to other markets overseas. US auto exports plummeted and have not recovered since.
Nevertheless, the 2020–21 period was not all bad for US manufacturing exports. American-made medical supplies needed to fight COVID-19 performed well. A combination of factors has also spurred shipments of American semiconductors and semiconductor manufacturing equipment. After the Trump administration threatened controls on US exports, targeted Chinese companies like Huawei and SMIC reportedly hoarded imports of American-made supplies out of fear of being cut off. More recently, electronics companies in China have increased their demand for chips because of the pandemic, prompting firms making more computers, servers, and other semiconductor-enabled equipment to scale up to the meet demands from the global population working and going to school from home.
US agriculture exports have recovered, although not enough to reach the targets
US farm exports are also not on pace to reach the phase one commitments, though they have performed relatively well. Through October 2021, agricultural exports were at 83 percent of pro-rated targets, up from 82 percent at the deal's midpoint (figure 3). Like manufacturing, US agricultural exports to China were devastated in 2018 and 2019 because of the trade war. Unlike its policy of spurning help for manufacturing, the Trump administration compensated farmers with billions of dollars of subsidies, resulting in net farm income in 2019 that was 5 percent higher than in 2017. Federal subsidies have continued; net farm income was an additional 20 percent higher in 2020 and is forecast to be 20 percent higher still in 2021.
Soybean exports to China remain only at 63 percent of the deal’s prorated target through October. With oilseeds making up nearly 60 percent of the value of agricultural exports covered by the phase one agreement, data from the last two months of 2021 could improve the sector’s performance. Soybean exports are currently estimated to run $13 billion short, though China could make substantial purchases given that November and December are among the crop’s larger shipping months historically.
Other farm products like corn, pork, cotton, wheat, and sorghum are running at or even above phase one targets. Nevertheless, some of these export successes may have little to do with the purchase commitments. For example, having lost World Trade Organization disputes over its policies toward corn and wheat, China has increased its imports of those products from the rest of the world, not just US farmers. Similarly, China's African Swine Fever outbreak devastated its domestic pig herd, resulting in China significantly increasing pork imports from farmers outside of the United States as well.
Some agricultural products have not recovered from the effects of the trade war. US exports of raw hides and skins are running at less than one third of the expected target. After being hit with Chinese tariffs, US lobster exports remain only about half as much as would have been expected.
Finally, despite agriculture's recovery, it is worth recalling that the Trump administration wanted China to buy an additional $10 billion of US farm products that it could not get into the deal. The legal agreement's Annex 6.1, footnote b, states (emphasis added), "At the request of the United States, China will strive to purchase and import $5 billion per year of the US agricultural products covered by this Chapter, in addition to the minimum amounts set forth herein." (Including the additional $10 billion implies US exports would be running at only 71 percent, not 83 percent, of the target.)
China’s purchases of US energy exports remain at only 37 percent of its target through October 2021 (figure 4). US exports of crude oil, liquified natural gas and coal have all increased considerably over 2017 levels. However, the legal commitments for the energy sector were extraordinarily large. (They were also questionable, given Bloomberg reports that the US energy industry indicated it had insufficient production capacity to meet them.) For coal, an additional concern was that US exports to China were only coming at the expense of American allies like Australia, which China has punished for pushing for an investigation into the origins of COVID-19.
China's purchase commitments in the energy sector were also problematic because they only covered carbon-intensive energy products. While President Trump did not share climate-change concerns, the Biden administration has rejoined the Paris Agreement and appointed former Secretary of State John Kerry as its climate envoy. Continuing to push China to buy an increasing amount of US fossil fuel exports would be inconsistent with broader goals of encouraging China to stop building coal-fired power plants and otherwise de-carbonize its economy.
Beyond the phase one elephant in the room
The first was to quickly reestablish a "targeted tariff exclusion process" to waive duties imposed by President Trump for some US companies hard hit in the trade war. Tai said this step was motivated by "what we hear from our businesses, especially our small and medium sized businesses that certainly have been impacted by the tariffs." The United States retains tariffs imposed by President Trump covering over $135 billion—or 93 percent—of imports of intermediate inputs from China. Tariffs on such parts and components increase costs for American companies seeking to compete not only for the business of American consumers, but also globally and in China through exports. The Trump administration granted some product exclusions, but most of the waivers have expired.
Tai also warned that the Biden administration maintains "serious concerns with China's state-centered and non-market trade practices that were not addressed in the phase one deal." Indeed, China did not agree to any commitments in the phase one agreement involving its subsidies or state-owned enterprises (SOEs). Worse, because the phase one agreement did not negotiate for the removal of China's retaliatory tariffs, the Chinese government has implemented an exclusion process whereby it decides what US exports get bought in China, thereby strengthening the role of the Chinese state and SOEs in the Chinese economy. Nevertheless, Tai did not offer specifics, nor did she indicate the administration had any plans to engage in "phase two" negotiations with China.
An additional area Tai did address was the need to "work with allies to shape the rules for fair trade in the 21st century, and facilitate a race to the top for market economies and democracies." This statement follows on the heels of the September summit kicking off the new US-EU Trade and Technology Council (TTC). The joint statement from the TTC meeting describes US-EU plans to work together to address "non-market distortive policies and practices that pose particular challenges for U.S. and EU workers and businesses," though also no details on how.
Gone are the days of tariff announcements by Twitter. The speech may have lacked details, but it was a start. Developing a new US trade policy approach requires engaging with China and America's allies, and it will take time. There are no quick fixes for trade policy.
Methodology used in this analysis
This blog post examines US export data only. The agreement's Chapter 6, Article 6.2.6 states "Official Chinese trade data and official US trade data shall be used to determine whether this Chapter has been implemented." The results using Chinese import statistics are qualitatively similar, as shown in Bown (2021). The details of the basic approach to mapping the annual targets for 2020 and 2021 to the monthly trade data are available in Bown (2021).
There are no publicly-disclosed targets for products at levels less aggregated than "Manufacturing," "Agriculture," and "Energy." When briefing journalists on the details of the phase one agreement in December 2019, USTR Robert Lighthizer refused to release details of product-specific targets, stating "Our judgment is that to make those things public, the subcategories could have a market impact, which is not in anyone's interest. But we'll have them and we'll keep them in the classified document" (Bown 2021, p. 30).
Thus, additional assumptions made here involve constructing estimates for 17 separate product categories. The approach is to apportion the product-level targets based on the share of that product in total US exports to China in 2017 of goods covered by the purchase commitments. See also table below.
The phase one agreement also includes legal commitments for US services exports. However, data on bilateral services trade is not available in high frequency to track China's services exports and is thus not analyzed here.
|Product||US exports as a share of total covered goods exports to China in 2017, percent||China's target as a share of total covered goods target in 2020 and 2021, percent||Schedule B codes|
|Total Covered Manufacturing||70.0||59.8|
|1. Aircraft, engines, parts||17.4||14.9||8800; 8802; 8411|
|2. Autos, trucks, parts||10.9||9.3||8703; 8704|
|3. Semiconductors||6.2||5.3||8541; 8542|
|4. Semiconductor manufacturing equipment||2.7||2.3||8486|
|5. Covid-19 related medical products**||2.9||2.3||2804400000; 2847000000; 3002130000; 3002140000; 3002150000; 3002190000; 3002200000; 3003100000; 3003200000; 3003900100; 3004101020; 3004101045; 3004105045; 3004105060; 3004200020; 3004200060; 3004490060; 3004600000; 3004901000; 3004909210; 3004909285; 3004909290; 3005100000; 3005900000; 3006700000; 8419200000; 8419390180; 9018113000; 9018118000; 9018120000; 9018194000; 9018195500; 9018197500; 9018310040; 9018310080; 9018310090; 9018320000; 9018390030; 9018903000; 9018907080; 9018908000; 9019200000; 9020008000; 9022120000|
|All other covered manufacturing||29.9||25.6|
|Total Covered Agriculture||22.0||21.0|
|10. Lobster||0.2||0.2||0306; 1605|
|13. Raw hides and skins||1.0||1.0||4101, 4102, 4103, 4301|
|All other covered agriculture||5.2||5.0|
|Total Covered Energy||8.0||19.2|
|14. Crude oil||4.6||11.0||2709|
|15. Liquified natural gas||0.4||1.1||271111|
|17. Refined energy products||2.6||6.1||2710122500; 271112; 271113; 2711190020; 271311; 271312; 290511|
|Note: *estimated based on methodology described in the Appendix. ** These products are defined by the USITC (2020) Covid-19 Related Goods: U.S. Imports and Tariffs, with Harmonized Tariff Schedule codes converted to Schedule B codes.|
|Source: Author's calculations.|