The art of the forgotten deal


At the start of 2020 before the coronavirus pandemic plunged world equity markets into panic, they had briefly found some small relief in what had appeared to be the beginnings of a trade agreement between the United States and China. This so called “Phase One deal” was hoped to be the end of months of wrangling back and forth counter tariffs between the two countries.

The phase one trade deal was officially signed on 15 January (Bloomberg) with Donald Trump hosting a celebratory lunch for the Chinese delegation in the White House, declaring relations to be “better than ever” and the Dow Jones finishing the day at a record high. The deal officially went into effect on 14 February. How things have changed in such a short period of time shows us just how volatile our world can be. So, what happened to the deal?

In a word, Coronavirus. The virus has ripped through the global economy causing chaos, as the prescribed antidote by governments around the world has been to lockdown populations to save lives but in the process strangling economies. The below chart shows how trade targets set out in the phase one deal for U.S. total exports and Chinese imports are on course to be dramatically missed by the year end. It is important to state that no targets have currently been breached as the legal text of the agreement states that targets must be met by calendar year end. The below data uses those agreed annual figures and pro-rata’s them to a monthly basis. Using data from Chinese Customs and the U.S. Census Bureau we can track the current import and export levels of good that the deal covers. What is clear is that the current year end targets look completely out of reach. Even before the full effects of the virus were felt, the chart below shows how the estimated trade activity needed to meet year end targets were being missed by both sides in January as factories across China closed down to a halt. This gap has only continued to widen over time reflecting the new economic reality of our post pandemic world.

Of course, when this deal was signed no one knew the implications that COVID-19 would have on the global economy. And now, in a post pandemic world, these targets seem to have no place in the new economic reality the global economy finds itself in. Many of the world’s major economies are experiencing recession and the U.S. economy has not looked more vulnerable in a very long time. It has only been as a result of the vast stimulus provided by the Federal Reserve that some signs of recovery are beginning to emerge, but the situation remains perilous. 


U.S. China Trade Targets


Agriculture had been a protracted element in the negotiations for a phase one deal, with the U.S. demanding China significantly increase its imports of agricultural produce from the U.S.. This, in part, would help Trump in the upcoming November elections as many key swing states exist within the corn belt. But the data below illustrates how agricultural exports and imports have lagged far behind where any reasonable model would suggest they should be at this stage in the year if they were to meet the year end targets fought hard for by the Trump administration.

U.S. China Agriculture Trade Targets


But we have witnessed a contraction in the overall trade between the two countries as the chart below shows (COVID-19 impact highlighted). Although we may at some point get rhetoric from both sides on who is to blame for the failure of phase one, the reality is much simpler, COVID-19 has made the deal signed at the outset of the year impossible for either side to realistically achieve.  

U.S. Trade in Goods with China


It seems implausible that the deal in its current form can continue long term, and with the U.S.-China relationship now some way off where they were during that celebratory lunch in January the likelihood of a new agreement being signed looks all the more unlikely. But both countries have suffered severe economic trauma from the pandemic which could act as a catalyst to soften negotiating stances. And with an election in November President Trump will undoubtedly have one eye on his campaign. As unpredictable as the first half of 2020 was, the second shows no signs of calming down in this roller-coaster of events.


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