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Trump’s trade deal on the line as China buys too little, too late

Ags - Grains/Beans 249 Ags - Meat/Dairy 203 China 2600 Consumer Staples 622 Energy - Conventional 384 Energy - Crude Oil 264 Energy - Natural Gas 124 Health Care 257 Info Tech - Tech Hardware 622 Trade Deals 906 U.S. 4625

The U.S. and China will hold ministerial level trade talks on August 15 to discuss progress on delivering the phase 1 trade deal between the two countries according to the Wall Street Journal. As flagged in Panjiva’s Q3 Outlook, the review is a requirement of the deal and may determine the state of U.S.-China relations running into the general elections in November.

Tariffs appear to have delivered the Trump administration’s primary trade metric of a lower deficit with a 3.5% year over year dip in imports in June, Panjiva’s data shows. That led to a 2.4% decline in the deficit, marking the 20th straight decline.

On the other hand the main benefit from the trade deal for U.S. businesses as negotiated by President Trump is a commitment from China to increase its purchases of U.S. merchandise. Total U.S. exports to China only increased by 2.3% year over year in June to reach $9.24 billion. That’s also 14.9% below the same month of 2017, the baseline year for the trade deal’s commitments. 

DOLLAR DIP IN DEFICIT DRIVEN BY IMPORTS

Chart segments U.S. merchandise trade with China by direction on a monthly and three-month average basis. Source: Panjiva

One option in the text of the trade deal is to adjust the commitments or timeframe on the basis of “market conditions”. The COVID-19 pandemic has certainly led to a schismatic change to global supply chains. Yet, Chinese imports appear to have largely recovered at the macro level, reducing the “excuse” provided from a demand perspective. Supplies on the other hand may be weak in places.

Panjiva’s analysis of U.S. exports of the 548 products covered by the deal shows that there were $6.28 billion of shipments in June, making an increase of 4.2% year over year and a rise of 12.8% versus 2017. Yet, that’s still a long way behind the target which implies an 81.0% increase 2020 compared to 2017 or $11.93 billion per month. For context that brings the year-to-date shortfall to $38.2 billion requiring a monthly average of $18.3 billion to unwind the missing purchase commitments by year end.

BARELY ABOVE LAST YEAR, NEVER MIND CLOSE TO TARGET

Chart compares U.S. exports to China of 548 products covered by phase 1 trade deal to full year target and level if shortfall is unwound over the rest of 2020. Source: Panjiva

Areas of success have included agriculture and energy where U.S. exports in June increased by 46.7% and 156.9% compared to 2017. The former has been driven by meat and cereals which rose by 363.2% and 91.8% respectively while soybeans – the largest export area – have yet to enter the harvest season. Energy exports have been largely down to a 222% increase in crude oil exports with LNG, an anticipated growth area, only contributing $41 million of exports. 

Both energy and agriculture have only increased recently however and year-to-date both are still well behind schedule. The biggest challenge has come from a shortfall in manufactured products where shipments have fallen by 3.8% year over year in June and by 3.7% year to date.

AGRICULTURE SURGE AWAITS SOYBEANS, ENERGY LOSES STEAM

Chart compares U.S. exports to China of 548 products covered by phase 1 trade deal by industry. Source: Panjiva

 

The main areas where there has been growth in U.S. manufactured goods covered by the deal have been in relation to healthcare with pharmaceutical supplies up by 30.3% in June 2020 versus June 2017 as well as an improvement year to date (but not in June) in optical and medical instrument supplies. 

The biggest surge in percentage and absolute terms, somewhat ironically given the basis of the trade war, has been U.S. exports of semiconductors which climbed by 36.4% year over year and by 93.8% compared to 2017. That may reflect stockpiling by Chinese buyers in anticipation of further restrictions on trade in technology products.

Taken together the data shows that the purchasing commitments element of the trade deal is out of compliance, creating another potential source of friction between the two countries which would come on top of: U.S. sanctions regarding Hong Kong‘s new security laws; U.S. engagement with Taiwan; sanctions targeted repression of the Uigher people in Xinjiang; apportionment of blame for the propagation of SARS-COV-2; and ownership and control of TikTok among others.

SEMICONDUCTOR, MEDICAL SALES SURGE DURING THE TRADE WAR AND PEACE 

Chart compares U.S. exports to China of products covered by phase 1 trade deal by industry on a monthly and three-month average basis. Source: Panjiva

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