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TRUMP’s CHINA SYNDROME UPDATE

In January Donald Trump the dealmaker negotiated a Phase l trade deal with the Chinese Vice-Premier Liu He in a big ceremony.  The deal was to signify a cease-fire from the destructive tariff wars.  The deal was to have China increase its purchases of U.S. goods by $200 billion over 2 years.  The object of the negotiations was to decrease the trade deficit that has grown to $323 billion by 2018.

Trump called the agreement transformative, sadly no it has not been realized.  This is another false hope Trump touts as a victory.  The latest trade figures compiled by Chad P. Brown of the Peterson Institute for International Economics show that China to date has not kept up with the agreed to terms.  China has fallen far behind its January commitments.  Mr. Brown claimed: “the chances it will meet it’s year-end commitments are effectively nil.”

China has effectively only purchased half of its objective by 30 September.  It is possible for a surge in spending prior to year-end, however it is unlikely.  China is stepping up its commitments on agricultural products, however, these products only comprise 22% of the agreement.  Manufacturing products comprise 70% of the Chinese commitment. 

The pandemic had not yet taken it’d toll on the supply chain and no one had anticipated it’s effects.  The virus has cut the volume of international trade significantly.  With air travel at an ebb there is no incentive for China to purchase any aircraft they had anticipated to be the major role of the manufacturing trade agreement.  China was to fulfill their target by purchasing Boeing 737 Max aircraft. 

Another factor in the lack of agricultural purchases is the Chinese swine fever outbreak that decimated ½ of the pigs in the country.  The Soy crop purchases were to be used in China as key protein fodder for pigs.  With the Soy crop the major portion of the commitment for agricultural product purchases the demand has fallen and the potential for China not meeting its agricultural commitment is very high.

Some of the shortfalls in the purchases may stem from the terms of the agreement Trump signed.   The agreement did not wipe the majority of the tariffs Trump placed on Chinese goods, so consequently the tariffs China had levied on U.S. goods remained as well.

Brown had observed that remaining tariffs includes tariffs on auto parts needed for U.S. Auto manufacturers to build cars and thus increasing the price of vehicles exported to China and thus also reducing the demand for U.S. autos in China.  To overcome that increase U.S. auto manufacturers are moving production to China.  Tesla’s that would have been built in California are now being built in is now being built in Shanghai.  BMW’s being built in Spartanburg, S.C. are now being built in China.

The Phase l deal also had robust purchases of crude oil and natural gas.  The high volumes of oil and gas as a result of the current price concerned the petroleum industry to the point that they warned that such high volumes of petroleum product could not be filled to meet the terms.

A second concern was the deal measured Chinese purchases of goods in U.S. dollars.  The pandemic has driven down the price of petroleum products and even briefly into negative territory.  This created a situation where you could pull all the oil out of the ground at maximum rate and not meet the dollar purchase  commitments.

The Phase l deal counting on all the purchases was overly ambitious.  It was never clear wither the Phase l deal meant that China was serious about it’s import commitments.  Many experts at the time of the agreement said the goals were “ambitious”, a polite way of saying “unlikely.” 

The path for China is steep if they are to meet their purchasing goals.  China needs to cram ½ year of purchases into the last 3 month’s of 2020.  In short Trump’s trade deal is coming apart at the seams.  It is not a surprise considering his tariff war has been a failure and now this debacle should open everyone’s eyes.  Trump’s tariffs have cost consumers billions of dollars and they appear to continue.  Trump insists that the tariffs are paid by China, sorry Trump that is another lie. 

In summary Trump has deprived farmers of their most important international export market and forced American manufacturing jobs offshore.  One would think this trade failure would be a learning experience in canny deal making for Trump, however, he has not shown any propensity to ever learn any lesson.