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How effective is Phase One trade deal to the US economy?

By: Chia Hao Guang, Dong Naige, Ong Guan Da

Research Head: Ong Guan Da Editor: Akshat Daga

Illustration by Chen Hsuan Ju Abstract

Relations between the United States (US) and China seem to be improving, with the signing of Phase One of the US-China Trade Deal. As US stocks rise, and the confidence of public investors continue to increase, this paper, though not definitive in its answer, aims to examine the effectiveness of the trade deal.


1.0 Unpacking the Trade Deal Phase One of the Trade Deal is built on 5 pillars: Chinese Imports; Tariffs; Intellectual Property (IP) concerns; currency rates; and the enforcement of the agreed terms (Phase one, 2020).


2.0 Implications on the US economy Although the Phase One trade deal saw little changes to the tariffs imposed, it served to halt the uncertain political momentum, thereby boosting consumer and business confidence worldwide. The US S&P 500 increased by 12% as the stock market has been uplifted by the anticipation for trade peace and closing of a two-year long trade dispute (Domm, 2020). There were also signs of loosening financial conditions such as the US yield curve turning uninverted and an appreciating Chinese currency (gained by 1.5%) relative to the US dollars (weakened by 2%) upon the announcement of the deal, all of which should accelerate the recovery of the US economy.



Source: CNBC China’s commitment to purchase an additional $200bn US exports such as agricultural products, services, energy and manufactured goods will lower the bilateral trade deficit with China and revive businesses in key sectors that drive the US economy. This allows the market to gradually pick up momentum and reduce unemployment rate, especially for the manufacturing sector which was the most affected by the trade war. The ease of tension also contributed to the stabilization of the global supply chain. Meanwhile, global growth, which was estimated at 2.9% in 2019, is forecasted to increase to 3.3% by 2020; the recovery was partly attributed to the improved sentiment brought by the trade deal. Against this backdrop, international trade and business activities are therefore projected to grow, cash inflow and foreign direct investments into the US economy will also increase. Hence, the trade deal will not only allow the US to benefit from increased purchases from China, but also more multilateral businesses brought by a healthy and recovering global economy. 3.0 Evaluating the Effectiveness of the Trade Deal Before diving into the depths of our analysis, it is important to note that given the relatively new introduction of the trade deal, there can be no definitive answer as to whether it will be beneficial to the US. For example, there is no guarantee that the two countries will resolve any disputes through consultations, as opposed to resorting to yet again tit-for-tat alternative.


3.1 Realistic Figure Firstly, critics argue that an import of $200 billion worth of purchases is unrealistic, particularly if we consider the Chinese Economy in two different periods. Period 1: Prior to the Trade War (2000-2007) US export growth to China averaged at only 21% per year even though China experienced growth that exceeded 10% per annum (Bown, 2020). Period 2: This period begins with the official signing of Phase One trade deal. If fulfilled, ‘the deal would result in a 92 percent increase—a near doubling—of US exports to China of the covered products between 2017 and 2021 (Bown, 2020). Yet, notwithstanding the Trade War, or the implications of the recent Covid- 19 outbreak, China’s economy is expected to slow (Lardy, 2019). If we take period 1 as precedent, it is largely uncertain whether the Chinese will be able to fulfil their obligation and purchase more than $200 billion worth of US goods and services. More importantly, a breach of contractual agreement may result in penalties being imposed by the US, and subsequently a retaliation by the Chinese as well. 3.2 Leverage Alternatively, say China- in overcoming the Covid-19 outbreak (hopefully)- is able to perform its obligation, China may gain a leverage over the US. Because the added purchase is not a product of the free market, but one of an intervention, the US may grow to be even more dependent on the Chinese economy in the future. If, for example, the Chinese increases its exports in subsequent agreements, the US will inevitably grow more dependent on China; Conversely (and hopefully not), if the Chinese do fail to perform meet its obligation in the future, the US’s economy may suffer yet another setback (Meltzer &Shenai, 2020). 3.3 In Consideration of Covid-19 Meanwhile, the world is plagued by Covid-19brought about serious economic repercussions. The epidemic has caused a temporary freeze to the Chinese economy, creating a ripple effect across the world. The uncertainty and seriousness of the virus have disrupted multiple sectors such as aviation, tourism and retail industries, forcing businesses to make hard decisions including hiring freeze and even mass layoffs. As a result, the Chinese markets dropped sharply, with the Shanghai Composite dropped by 7.7% and Shenzhen Composite by 8.4%. Goldman Sachs analysts predicted that the virus would lower Chinese GDP growth by 0.2% points in the first quarter. As a result, despite its trade deal pledge, the hits to its businesses


and consumers will highly likely to reduce China’s import appetite. This has led to many economists questioning China’s ability to meet the commitments and the ultimate effectiveness of the trade deal in contributing to the recovery of the US economy (Bermingham, 2020). However, the impacts are likely to be short-lived. Based on past pandemics experiences, the economy would follow a V-shaped recovery pattern - a short and sharp economic shock that lasts for around three months, with a rebound to normal levels of economic activity shortly afterwards (Areddy, 2020). Hence, with Chinese consumers’ spending power and pattern, the economy is likely to recover rapidly and would not have material effects on the trade deal. 4.0 Conclusion Overall, although the trade deal has improved business and investor sentiments, it does very little to improve things in the immediate term as the agreement is highly unbalanced, addresses no root issues and barely removes any existing tariffs on more than US$500 billions of US-China bilateral trade. China’s commitments to the additional US$200 billions of US imports are often seen as unrealistic and precarious. Nevertheless, Phase One trade deal signals the possible ending of the intense trade dispute and with the two countries still in negotiation of the Phase Two trade deal, the effects of the trade truce can only be examined holistically and comprehensively when the whole package is rolled out.


References

1.Areddy, J,T. (2020, February 3). Coronavirus Closes China to the World, Straining Global Economy. The Wall Street Journal. Retrieved from https://www.wsj.com/articles/coronavirus-closes-china-to-the- world-straining-global-economy-11580689793

2.Bermingham, F. (2020, February 26). Coronavirus: China ‘Fully Expected’ to Meet Trade Deal Terms Despite Covid-19 Outbreak, Top US Officials Say. South China Morning Post. Retrieved from https://www.google.com/url?q=https://www.scmp.com/economy/china- economy/article/3052345/china-fully-expected-meet-trade-deal-terms- despite&sa=D&ust=1583325947776000&usg=AFQjCNEAy6a7U9NSRG3YiNbXzxjQ3xU6mA

3.Bown, C, P. (2020, January 21). Unappreciated Hazards of the US-China Phase One Deal. Peterson Institute for International Economics. Retrieved from https://www.piie.com/blogs/trade-and-investment-policy- watch/unappreciated-hazards-us-china-phase-one-deal

4.China’s US Trade War Deal is ‘is Good for the World’ and ‘Will not Impact’ Imports from Other Countries. (2020, January 22). South China Morning Post. Retrieved from https://www.scmp.com/economy/china-economy/article/3047132/chinas-us-trade-war-deal-good- world-andwill-not-impact

5.Domm, P. (2020, January 15). China Trade Truce is Seen as ‘Fragile’ with Analysts Still Seeing More Tariffs as a Possibility. CNBC. Retrieved from https://www.cnbc.com/2020/01/15/china-trade-truce- is-seen-as-fragile-with-analysts-still-seeing-more-tariffs-as-a-possibility.html

6.Phase one. (2020). Economic and Trade Agreement between the United States of America and The People’s Republic of China. Scribd. Retrieved from https://www.scribd.com/document/443066765/Full- document-US-China-phase-one-economic-and-trade-agreement#download&from_embed

7.Meltzer, J, P &Shenai, N. (2020, February 4). Why the Purchase Commitments in the US-China Trade Deal Should not be Replicated, Ever. Brookings.

Retrieved from https://www.brookings.edu/blog/up-front/2020/02/04/why-the-purchase-commitments- in-the-us-china-trade-deal-should-not-be-replicated-ever/

8.Lardy, N, R. (2019, August 21). China’s Growth is Slowing, but not Because of the Trade War. Peterson Institute for International Economics. Retrieved from https://www.piie.com/blogs/china-economic- watch/chinas-growth-slowing-not-because-trade-war

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