China a bright spot for US in gloomy global trade picture

By The Wall Street Journal

Trade increases during COVID-19.

China has retaken its mantle as America’s largest trading partner, emerging as a rare bright spot for U.S. farmers and other exporters as the coronavirus pandemic constrains global commerce.

Trade between the two nations rose to $39.7 billion in April, up nearly 43% from the month before, and enough to once again surpass Mexico and Canada. The jump followed the signing of a trade pact in January in which China agreed to sharply step up purchases of U.S. farm products and other goods.

U.S.-China trade remains well below the record $61.4 billion set in October 2018, and economic fallout of the coronavirus pandemic has cast doubt on China’s ability to meet ambitious purchase targets set in the trade accord. China is nonetheless the only major world economy likely to post positive growth this year, according to a recent World Bank forecast.

“China looks like it could be the biggest engine of global GDP growth in 2020 and maybe 2021,” said Craig Allen, the president of the U.S.-China Business Council. “We want American companies to benefit from that absolutely.”

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Despite the rise, China is so far not on pace to meet purchase terms under the trade pact, which specifies that it increase purchases of U.S. goods and services by $200 billion over 2017 levels over a two-year period.

Mr. Allen contends that the deal shouldn’t be judged solely on the purchase targets, however, pointing out that China’s commitment to scaling back regulatory measures is of greater long-term significance to U.S. companies.

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“There have been very significant regulatory changes in intellectual-property rights, agriculture and financial services,” said Mr. Allen.

It is yet to be seen how far China will go in enforcing intellectual-property rights of foreign companies—long a sore spot with U.S. companies that say Chinese competitors have appropriated their trade secrets with impunity. But by at least one metric—for agricultural products—China has stepped up its purchases.

U.S. farmers felt the brunt of the trade war, as China retaliated against U.S. tariffs by scaling back purchases of soybeans, corn and other farm exports.

In recent months, however, China has boosted its purchases of crops like corn, wheat and soybeans to higher levels than before the trade war. And China has emerged as a more pivotal buyer than ever—in the five weeks through June 4, for example, China purchased about two-thirds of all gross sales of U.S. soybeans.

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To be sure, even with the economic benefits of the refreshed relationship with China, the massive shortfall in the Chinese purchase targets could present a growing quandary for the Trump administration if the aggressive two-year purchase targets aren’t met.

And beyond trade, other tensions are festering between the two nations, including China’s moves to dismantle Hong Kong’s autonomy and the U.S. criticism over China’s handling of the initial outbreak of Covid-19, the disease caused by coronavirus.

“Covid has made China politically toxic,” said Derek Scissors, a resident scholar at the American Enterprise Institute, a conservative think tank. “Even if U.S. exports somehow move much higher, much faster than anyone expects, it can no longer give the president what he was looking for politically. There’s no way for him to claim Phase 1 [of the planned multiphase deal] has made the China relationship a success.”

Already, political clamor has been growing around whether China would reach the targets. Sen. Rick Scott (R., Fla.) sent a letter June 11 to the Office of the U.S. Trade Representative saying “we must focus on holding China accountable if they fail to comply” with the purchase goals.

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Publicly, despite the pressure and shortfalls, Chinese and U.S. officials have signaled they are attempting to see the deal through. In May, the USTR issued a rare statement, saying that Chinese and U.S. officials “agreed that in spite of the current global health emergency, both countries fully expect to meet their obligations under the agreement in a timely manner.”

A companion statement from Chinese said both sides were working to create favorable conditions for the trade deal.

U.S. Trade Representative Robert Lighthizer is expected to face questions over the deal at appearances before House and Senate committees Wednesday.

Even with a strong global economy, the countries would have needed an unprecedentedly rapid increase in trade of many items to hit the goals.

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“I have been skeptical that the targets would be achievable—for economic reasons—even before” the pandemic damaged the Chinese and global economy, said Chad Bown, a senior fellow at the Peterson Institute for International Economics.

Mr. Bown calculates that China needs to purchase $172 billion of U.S. goods this year to meet the target for 2020. With data now tallied for the first third of the year, China should have purchased about $58 billion of goods to be on track to hit the goal.

So far, however, China has purchased just $26 billion of goods, less than half the pace it needs to meet its goal for 2020, according to Mr. Bown’s calculations.

The deal specified an even more aggressive target for 2021, and more favorable economic conditions could give China a better chance at hitting the target in the second year.

China is about halfway to its target on agriculture for 2020, but is already buying over half of some U.S. crop exports. There is no way for a country buying more than 60% of an exported commodity to double its share of purchases of those items.

For other goods, the plunge in financial markets is a profound challenge. China is on pace for only about 3% of the U.S. energy purchases to which it was committed. The collapse of global energy prices in 2020 has placed this goal even further out of reach, at the same time as the slowdown in economic demand means even China doesn’t need as much energy as expected this year.

When the trade deal was signed in January, a barrel of oil traded for about $65. In April, oil prices dropped below $20 a barrel (with some contracts even turning negative). That presents an enormous challenge for targets that were agreed to in terms of total dollars. At $20 a barrel, China would have to buy more than three times the volume of oil to hit the same target as when oil was $65.

Finally, China also agreed to boost trade in services, a goal that could prove impossible to hit now amid the travel restrictions that have been imposed to thwart the virus. Over half of U.S. service exports to China take place via tourism and higher education, so restrictions directly stop such activities from occurring.

At the same time, the deal’s regulatory provisions paved the way for U.S. banks, credit-card networks, insurance companies and investors to do business in China, presenting one of the best growth opportunities for U.S. financial services in years, and another example of a win for businesses even as the services target is missed.

“If anything, the pandemic provides the Trump administration an excuse to keep the deal going despite China’s lack of progress toward meeting the unreasonable purchase targets,” said Mr. Bown.