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August 13, 2020


US/CHINA: Phase 1 trade deal faces elevated risks as US election approaches

BY Gabriel Wildau

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  • Some advisors to US President Donald Trump are urging him to abandon the phase 1 trade deal, while neither Democratic challenger Joe Biden nor Congress appear willing to defend it.
  • The US trade deficit with China hit a 20-month high in July, and Chinese purchases of US exports are far behind the pace required to meet the deal’s full-year targets.
  • US and Chinese trade negotiators will hold formal talks on 15 August to discuss progress on implementing the deal, creating a potential window for Trump to announce a pullout.

Despite the sharp deterioration in US-China relations, we argued in previous notes that the phase one trade deal had become an anchor of relative stability, with both US President Donald Trump and the Chinese leadership facing strong incentives to maintain the deal. While this basic logic still holds, countervailing pressure on Trump to abandon the deal is rising as the US election approaches.

US Trade Representative Robert Lighthizer and Chinese Vice Premier Liu He will meet by video conference on 15 August to discuss progress in implementing the deal, which calls for such consultations every six months. According to media reports, some hardline voices within the Trump administration, including White House trade advisor Peter Navarro, are urging Trump to abandon the deal. These advisors emphasize that the pace of Chinese purchases of US exports is far behind the pace required to meet the deal’s full-year targets.

If Trump wants to preserve the trade deal, he could treat the pandemic as a force majeure that excuses China’s failure to meet the purchase targets. An assistant Chinese commerce minister made this argument on 13 August, saying that the pandemic had affected Chinese purchases of US good. The collapse of global oil and gas prices has also contributed to China’s failure to meet the deal’s dollar-denominated targets for energy purchases.

But given that China’s own exports are performing well, Trump may find the force majeure interpretation unpersuasive. For a president who focuses heavily on the bilateral trade balance, recent data is not encouraging. Chinese exports to the US rose by 12.5% year-on-year in July, while import growth was only 3.6%, pushing the US bilateral deficit to its highest single-month level since November 2018. On the other hand, Chinese importers have accelerated purchases of US soybeans, corn, pork, and other commodities in recent months, which benefits a key political constituency for Trump. China’s soybean imports could accelerate further during this year’s harvest season in September and October. A decision to abandon the deal would almost certainly lead Beijing to curtail such purchases, which could damage Trump’s electoral support among farmers.

Some voices within the administration continue to argue in favor of preserving the deal. Larry Kudlow, director of the White House National Economic Council, said on 11 August that trade relations with China are “fine right now.” But a similar internal White House debate played out over the recent decision to ban TikTok and WeChat with Navarro favoring the ban and Treasury Secretary Steven Mnuchin and Kudlow opposing it. Trump ultimately sided with Navarro.

Outside the administration, neither Democratic presidential challenger Joe Biden nor members of Congress from either party appear willing to publicly defend the trade deal. Remaining support comes mainly from the business community, whose lobbying power is diminishing as the election approaches. This dynamic may weaken the influence of Kudlow and Mnuchin – who typically represent pro-business viewpoints within the administration – relative to Navarro and other hardline voices like Secretary of State Mike Pompeo and National Security Adviser Robert O’Brien.

Trump himself has probably not yet reached a decision. The days following this weekend’s formal consultation offer a possible window for an announcement. However, Trump may also decide to delay such a decision until September or October to maximize the electoral benefit. The most likely outcome remains that the deal limps through to the election, but risks to the deal are now higher than at any time since it was signed in January.

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