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‘Phase one’ was doomed to disappoint, and it did, say analysts

The 2020 agreement that de-escalated the Sino-U.S. trade war set unrealistically high goals for U.S. exports to China and failed to deliver on them by large margins, say analysts. Overall, China bought just 57% of the goods and services it committed to buying as part of the “phase one” agreement. The agriculture sector, at 83%, came closest to reaching its export goal.

“Today, the only undisputed ‘historical’ aspect of that agreement is its failure,” wrote Chad Bown of the Peterson Institute for International Economics, a think tank. “Beijing seems intent on becoming more state centered and less market oriented.”

Sitonia Consulting, which specializes in China’s agriculture market, said the two-year pact “was doomed to disappoint,” with overly aggressive goals for farm and food trade. “Even when they were initially released, they seemed unlikely to be reached.”

The phase one agreement expired at the end of 2021, with China clearly far from compliance. The Commerce Department released the year-end trade figures this week. The trade deficit with China widened to $355 billion, an increase of $45 billion from 2020. Overall, the U.S. trade deficit was a record $859 billion in 2021.

Soybeans account for roughly 60% of U.S. ag exports to China and are a leading reason why U.S. farm and food sales fell short under phase one, said Bown and Sitonia. Soybean sales plunged during the first year of the trade war, and although they recovered, in the end they reached just two-thirds of the needed volume.

“It is almost impossible to compel the large private international crushers to buy more U.S. soybeans if there is no need or margins are not desirable,” said Sitonia. “Ultimately, those companies looked at economic factors like feed demand, ocean freight, and cash basis levels, and ended up buying soybeans from other origins like Brazil or Argentina if they were more economical.” At the signing ceremony for phase one, Chinese vice premier Liu He said purchases would depend on domestic demand and U.S. prices.

China purchased a record $33 billion worth of U.S. ag exports in 2021 on top of $26.4 billion in 2020, according to USDA data. While those were huge increases from $9.2 billion in 2018 and $13.9 billion in 2019, they were still below the phase one obligations.

Agriculture Secretary Tom Vilsack is among U.S. officials who have called on China to live up to its commitments.

“The future of U.S.-China trade deals remains uncertain,” said Sitonia. “The United States is also experiencing the highest inflation in 40 years, so pressuring China to import more U.S. products to fulfill the previous administration’s goals ahead of upcoming midterm elections might not be politically palatable.”

A new trade strategy toward China is needed, said Bown. Phase one did little to resolve longstanding U.S. complaints about Chinese trade practices, rebuild business ties between the countries, or fuel the free market in China, he said. “One start to the new strategy has involved the United States working with other major economies. … Even if policymakers agree that multilateral purchase commitments must be part of a long-term solution to China’s trade relationship with the world, they should learn the right lessons from the U.S. experiences under the phase one agreement.”

Produced with FERN, non-profit reporting on food, agriculture, and environmental health.
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