The path to avoid a more destructive US-China trade war is a narrow one

One of President Trump’s first measures regarding US-China trade was directing an assessment of China’s progress on the Phase One Trade Deal agreement.

As a refresher, the main terms of this agreement were for China to ramp up imports from the US by USD 200bn in the years 2020-2021, with 2017 used as a baseline. The targeted breakdown for increasing these imports was as follows:

• Manufactured Goods: USD 77.7 bn
• Agricultural Products: USD 32 bn
• Energy Products: USD 52.4 bn
• Services: USD 37.9 bn

The initial and obvious take on this is that it will be bad news for China on this front.

It should come as no surprise that China did not complete its targets in 2020-21. Our look at the headline and rough categories available from the US Census Bureau’s data shows the following:

• Total goods imports: after falling in the trade war years and the pandemic outbreak year of 2020, China’s total goods imports from the US were higher than in 2017 in each of the subsequent years.
• Manufactured Goods: imports fell USD 8.5bn and USD 0.1bn in 2020 and 2021 from 2017’s baseline of USD 71.2bn.
• Agricultural Products: imports rose USD 5.6bn and USD 12.2bn in 2020 and 2021 from 2017’s baseline of USD 19.3bn.
• Energy Products: imports rose USD 1.1bn and USD 6.9bn in 2020 and 2021 from 2017’s baseline of USD 8.9bn.
• Services: imports fell USD 18.9bn and USD 2.4bn in 2020 and 2021 from 2017’s baseline of USD 54.6bn.

The data will likely show that none of the purchase targets were met, and given the hawkish tone towards China, we expect to see this as the key takeaway for many. If Trump seeks to ramp up tariffs on China, the data will likely provide sufficient ammunition for him to do so.

However, context is important. Soon after the trade deal was signed on January 15th 2020, China was hit with the devastating Covid-19 pandemic, which upended the global economy, and the supply chain disruptions, as well as competing demands on resources, certainly threw off China’s ability to ramp up its imports as agreed upon. Biden’s election victory in 2020 also threw a wrench in the agreement as it was unclear whether or not these deals struck under Trump’s administration still held any weight.

As a result, we think it is also worth monitoring how China’s imports evolved after the pandemic-skewed years.

• Total imports of both goods and services began to recover in 2022.
• Manufactured goods imports have been lower than 2017 levels in every year from 2018 onward.
• Agricultural product imports have been higher than 2017 levels every single year since the Phase One Trade Deal was reached and was closest to completing the purchase targets.
• Energy product imports have also been higher than in 2017 levels every year since the Phase One Trade Deal.
• Services imports fell sharply during the toughest anti-pandemic measures in 2020 and 2021 but began recovering in 2022 and 2023.

What does this combination of data tell us?

• Although the targets have not been reached, at least some progress has been made in three of the four categories.
• It is clear that the drop in manufactured goods imports is the main outlier. Why did this category drop so much? It is likely that, at least in part, this is due to the de-risking of supply chains. We saw the Biden administration begin implementing export controls blocking the export of semiconductors and semiconductor manufacturing equipment, among other hi-tech exports to China, starting in 2022 and further tightening these controls multiple times in subsequent years. These restrictions also impacted China’s imports of US-manufactured products.

The question is, how much of the shortfall in terms of purchase targets will be attributed to China intentionally not living up to the agreement, and how much can be justified via extenuating circumstances and China’s slowdown?

Will the backdrop behind the import performance and the progress seen in 2023 and 2024 be sufficient to renew the original agreement?

There is no easy answer to this, as there will likely be a great deal of subjectivity in the final judgment. It’s possible that the US and China could resume this agreement. However, considering the data in a vacuum and adding the fact that many of Trump’s cabinet are China hawks, this investigation feels likelier to set the stage for further tariffs ahead.