Is China Living Up to the Phase One Trade Agreement?

Of all the nations in the world right now, China is the most fascinating to watch. How can a state go from the apparent heir to the world’s superpower to a place on the brink of disaster? A currency crisis, a debt tsunami, a totalitarian government, and a Ponzi scheme economy are to blame, and the hopes and dreams of China are about to be ripped apart like Made in China tags on the backs of T-shirts and electronic gadgets. The only hope for President Xi Jinping and his Communist government is moving forward with a phase two trade agreement. But even that has come into question since the phase one deal is constantly in doubt. The Chinese cannot catch a break. Perhaps their leadership should heed the advice of Confucius: “When it is obvious that the goals cannot be reached, don't adjust the goals, adjust the action steps.”

‘Yes, It’s Over’

Jeepers creepers! White House trade adviser Peter Navarro recently gave the U.S. stock market in after-hours trading a case of the heebie-jeebies when he told Fox News’ Martha MacCallum that America’s relationship with China was “over.” But he did not mean it, according to a White House statement.

Navarro quickly clarified his remarks after the leading indexes tanked, noting that “my comments have been taken wildly out of context.” Navarro confirmed that he was not talking about the phase one trade deal. Instead, he was referring to the “lack of trust” with Xi and the Chinese government, alluding to the origins of the Coronavirus and subsequent pandemic.

Even President Donald Trump had to perform some damage control, sending out a late-night tweet that the trade deal “is fully intact!”

But is everything OK? Is China living up to the provisions of the pact that was signed in January? Or is there big trouble in little China, with the United States preparing to decouple officially? Perhaps to answer these complex questions, it would be prudent to look at a major American crop: soybeans.

Betting the Farm

The biggest headache in the U.S.-China affair has been agriculture. According to the arrangement, Beijing would be required to purchase $36.5 billion in U.S. goods. So far, the world’s second-largest economy has met only 15% of its farming commitments, but industry observers believe China will ramp up purchases in the second half of the year.

It was initially reported that China mandated state-owned firms to suspend U.S. soybean imports. Data from the U.S. Department of Agriculture (USDA) suggest that the reports be false because private and state-run buyers have been striking deals for the 2019-2020 and 2020-2021 marketing seasons. Although China has been importing record amounts of soybeans from Brazil because of a weak currency and cheap supplies, only the United States has been able to meet its intensifying demand.

In an ironic twist, China’s General Administration of Customs is reportedly suspending poultry imports from Tyson Foods after an Arkansas facility confirmed Coronavirus cases. The company stated that COVID-19 could not be transmitted through food, but for a nation that could be witnessing a second wave of the virus, maybe Beijing is not taking any chances.

If reports are accurate, this would be a blow to the American poultry industry. Late last year, China removed a five-year ban on U.S. poultry, which was imposed following an outbreak of avian influenza in December 2014. The decision cost the United States more than $500 million.

Should investors be concerned? Secretary of State Mike Pompeo recently held clandestine talks at an Air Force base in Hawaii with Chinese Communist Party Politburo member Yang Jiechi. Pompeo tweeted that China has pledged to honor its commitments under the trade agreement. Since the outbreak started, there had been some speculation that Trump would ease up on the demands inside the pact. The administration chose to apply pressure and confirmed that it still expected China to abide by the provisions.

A Big Red Flag

There is a lot of uncertainty surrounding the deal. Despite assurances that everything is fine from those standing in front of a burning building, actions and statements point to at least some level of consternation among officials. When representatives continually verify that U.S.-China relations are superb and that the phase one deal is proceeding as expected, you might want to start second-guessing.

Both sides have been engaging in a war of words. President Trump has threatened to sever ties, impose new tariffs, and sanction Chinese officials over Hong Kong. China has unloaded some of its holdings of Treasurys, jabbed the United States over Black Lives Matter, and slammed the administration on many policy fronts, including its decision to blacklist Huawei.

Are the United States and China set to embark on a new Cold War? Neither country can afford it. China is heading for a full-year economic decline, and the uptick in confirmed Coronavirus cases has the country on edge. Plus, many fiscal and monetary issues plague the health of the paper tiger. The U.S. economy is projected to rebound in the second half, but the intensity of growth is unclear due to a myriad of factors. Another trade dispute is one of those hindrances.

Victimized, Conquered, and Outwitted

At this point, will there even be phase two trade negotiations? The United States has barely capitulated to anything, while China keeps conceding points to the administration. Trump barely gave up anything to achieve the provisions in the first phase. China’s only victory has been a gradual reduction in the tariffs the president implemented, though it is American businesses and consumers that mostly bear the brunt of these penalties.

In the next round of talks, Beijing would unlikely accomplish anything substantive, except additional cuts to import levies. The most significant sticking point for China would be Huawei and its 5G technology, but this is a futile battle since the White House has banned the company through May 2021. Considering the state of the red dragon’s economy, China has become a helpless and whimpering victim to the United States. That should continue unless Trump loses in the fall, and his successor returns the nation to bowing to the Asian superpower.

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Read more from Andrew Moran.