What You Need to Know About the U.S.-China Phase 1 Trade Deal

What You Need to Know About the U.S.-China Phase 1 Trade Deal

Walter Kunisch Jr.

Jan 23, 2020

On Wednesday, January 15, President Trump and Chinese Vice Premier Liu met in Washington, D.C., to sign the first component of a multi-stage trade agreement between the two nations.

More commonly known as the Phase 1 Trade Agreement, the deal seeks to address some of the major issues that have caused a two-year political and economic spat between the two countries. The Phase 1 Trade Agreement sought to increase the sales of U.S. goods and services to China, further open Chinese markets to foreign firms — particularly in financial services — and provide strong new protections for trade secrets and intellectual property.

Key takeaways from the Phase 1 Trade Agreement

Below are takeaways from the Phase 1 Trade Agreement that we at Farmers Business Network℠ (FBN) think are the most pertinent and relevant for the U.S. farmer:

1. From an agricultural perspective, the language of the deal does not list details of U.S. agricultural commodities, committed volumes and/or a committed time frame for future commodity purchases. We view this as a letdown for the U.S. agricultural community.

2. The Chinese publicly stated that the country is committed to purchasing agricultural commodities in accordance with domestic demand and global market conditions . The Chinese made this comment in December and Vice Premier Liu reiterated the position at the signing ceremony in Washington, D.C.

At FBN, we are particularly concerned about this stipulation as it has the ability to  deprioritize potential export volumes of key U.S. row crops such as corn, soybeans, sorghum and wheat, which might direct the purchase dollars to other commodities.

Remember, Brazil is the world’s largest exporter of soybeans and China is the largest buyer of Brazilian soybeans. If Brazil produces a bumper soybean crop this year, which forces Brazilian export prices lower, the lack of Chinese commitments to purchasing specific quantities of U.S. soybeans could become problematic.

3. China agrees to a $32 billion increase in purchases that uses the total dollar amount of U.S. agricultural commodity purchases from 2017 as a baseline figure for future trade activity. China agrees to purchase $12.5 billion more in ag goods from the U.S. in year one and $19.5 billion in year two. There are no details for future years.

4. Overall, agriculture purchases have smaller financial goals for increased trade under the deal than energy — specifically natural gas, manufacturing and services, including financial services.

5.The agreement provides language to create an administrative framework to help enhance cooperation between the two countries and increase the traceability and phytosanitary safety of U.S. processed foods, protein combos/primals, animal feeds and agricultural row crops.

6. The list of agricultural commodities that are mentioned and are subject to Chinese purchases is comprehensive but essentially represents those impacted by the retaliatory tariffs that the Chinese imposed starting in 2018. 

This list includes common agricultural items such as soybeans, cotton, fruits and nuts, to even the uncommon commodities like human hair (presumably for wigs), wool grease and vegetable wax.

7. Ethanol is not mentioned in the Phase 1 Trade Agreement, but the language defines administrative reforms that China will take to help facilitate exports of DDGS.

8.The deal includes monitoring and enforcement mechanisms to help ensure that Chinese imports of U.S. agricultural commodities are in compliance with the trade terms.

9. The agreement acknowledges that China will work to amend or “fix” the existing tariff rate quota (TRQs) for corn, wheat and rice to address compliance issues with the World Trade Organization (WTO).

What this means for the U.S. farmer

At FBN, we believe that the Phase 1 Trade Agreement is anticlimactic for the U.S. farmer. Marketed as a type of economic panacea for the U.S. farmer, the trade deal leaves us at FBN wanting more. Because the language does not contain firm commitments on commodities, volumes or time frames, we view this as short-run bearish and long-run neutral.

We believe that traders had hoped for transparency to support the recent price strength and without it, the market will go back to gauging competitiveness and looking for tangible signs of transactions to bring more upside.

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Walter Kunisch Jr.

Jan 23, 2020