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Phase-one is totally done

By Staff | Jan 3, 2020

According to USTR Robert Lighthizer, Phase-one of a trade deal with China is “totally done”. I hope that the Chinese can come to Iowa, if not for the signing then at least to mend fences and nail down our new commercial trade relationship. A pivotal choice was made here with this trade agreement. It was made by China. They could have resisted and taken the trade war with the U.S. to something elevated to the point of a cold war, decoupling from the U.S. or continue to be engaged and accommodate some substantive changes and reforms necessary to placate the U.S.

As far as our ag sector is concerned, my primary response to phase-one is one of relief…more so than elation (although I am happy too). China will be the big kahuna of ag markets with the right combination of number of consumers with money and it would have been hard to understate the loss to us had China opted to separate our relationship. Donald J. Trump (DJT) set down the terms of what it took to stay in the marriage and frankly, he would never admit it, but he is relieved too. A messy divorce would have impacted all of the neighbors as well as the neighborhood and gotten crazy. A cold war is in no one’s interest.

There is a winner here, the U.S., and credit is due. The ag sector got nailed in the process but as I have forecast, things should look up in the coming election year. The ag economy went into recession because of Trump’s trade wars. They have to do a lot of commodity buying in order to make up for what has happened to us. No reason to dwell on that now. We just need to fight for what we are being told that we get in this deal. We get that $50 billion and it is a big deal. Certainly, fantastic relative to the alternative.

Phase-one is phase one and while it is a victory, there is a whole lot more to come here with relations with China and trade in general. There are many geopolitical frustrations and flash points between the U.S. and China. Having a trade deal in place will produce a sort of guard rail that could keep other areas of contention from getting crazy.

Phase-one had them primarily do three things. They passed protections for intellectual property, which will frankly work in their interest. Pirating copyrights didn’t create wealth for them either. It destroys wealth. The next provision was protection against currency manipulation. China had relented from manipulating their currency some time ago so that the U.S. Treasury department could not label them a currency manipulator under the rules. They did not really give anything up here. The last provision was to buy U.S. $50 billion in commodities annually and $300 billion in U.S. goods in the next two years overall. That doubles U.S. exports to China.

For that, Trump dropped the threat of more tariffs and reduced the previous round from 15 percent to 7.5 percent while keeping the initial 25 percent on $250 billion in Chinese imports. Those tariffs will be traded away for additional Chinese concessions in phase-two. Trump has to be relieved too as if forced to follow through on more tariffs, both the global and U.S. economies would have been damaged by the trade war, for which he would have been blamed. The threatened tariffs that were dropped, would have added $110-$130 to the cost of each I-phone. U.S. consumers would have felt that.

China was going to buy most of these goods from somewhere. What the deal does is make their market more captive to us. We have lost market share to ag competitors. The Ukraine, Argentina and Brazil have benefited greatly from our trade war with China. In order to comply with the $40 billion commitment, plus a promise to add another $10 billion in two years buying commodities here, China will be buying more U.S. pork, beef and chicken and less from others, including Canada and the EU. Supply chains that adapted to fill Chinese demand created by the tariffs on U.S. ag goods will be disrupted as the apple cart will be upset again. Brazilian farmers are facing an abrupt turn in fortunes and will have a problem.

The impeachment was impacting governance in Washington. Both sides want to appear to look effective so came to terms on the USMCA and budget accord. Trump is trying to replace impeachment headlines with those touting his wins. Most, including Trump supporters, do not like Trump personally so they focus on results. He must have results. This trade deal is a big one for him. He will have a very positive narrative to spin on trade. I think that the trade deal will buy them some restraint from Trump on geo-political flash points. Trump was only using Hong Kong for what he could milk from it. There was some great concern that the trade war was heading in the direction of a cold war and this is a step back. Even Henry Kissinger had ventured a trip to China to counsel them and us saying…”For Chinese leaders their view of national development is not necessarily threatening the U.S., but of making China strong. So, I don’t consider China started it…history started it.” I have to admit that I have not understood the degree of US belligerence toward China promoted by demagogues as justifiable.

Trump has wins in trade agreements with South Korea, Japan, the USMCA and now China to tout. It is not over and done with. I cannot think that he will waste a lot of time with metals tariffs on Argentina and Brazil. Then again, he sees them so weak as to make them subordinate.

Next, of more significant scale, will come confrontations with the UK, EU and WTO. He will take the momentum from his wins into negotiations and trade battles, if need be, with these entities. They should be nervous. More to come.

David Kruse is president of CommStock Investments Inc., author and producer of The CommStock Report, an ag commentary and market analysis available daily by radio and by subscription on DTN/FarmDayta and the Internet.

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