China to Import Additional US$200bn US Imports Over Next Two Years

On 15th January 2020, the US and China signed the ‘Phase one’ deal, which covers intellectual property, technology transfer, agriculture, financial services, currency, expanding trade and dispute resolution. More importantly, in terms of trade, China has commited to import various US goods and services over the next two years from January 1 2020 through December 31 2021. By category, most additional imports will be manufactured goods totalling US$77bn (US$32.9bn increase in 2020 and US$44.8bn increase in 2021. This is followed by energy of US$52.4bn (US$18.5bn in 2020 and US$33.9bn in 2021), services totalling US$37.9bn (US$12.8bn in 2020 and US$25.1bn in 2021) and agriculture amounting to US$32bn (US$12.5bn in 2020 and US$19.5bn in 2021). China will also aim to purchase and import additional US$5bn worth of US agricultural products per year on top of the minimum increase of US$32bn.

As for currency, China’s has also pledged to refrain from competitive devaluations and targeting of exchange rates, while promoting transparency and providing mechanisms for accountability and enforcement. Prior to the signing of the ‘Phase one’ deal, the US Department of the Treasury announced that China is no longer labelled as a currency manipulator as China has made commitments to not devalue its currency and not target its exchange rate for competitive reasons. Despite this, China is now positioned in the ‘monitoring list’ alongside nine other countries including Germany, Ireland, Italy, Japan, Korea, Malaysia, Singapore, Switzerland and Vietnam. China will remain in the list for at least two consecutive reports in order to ensure that any improvement in the performance of these countries are sustainable and not due to temporary factors.

The ‘Phase one’ deal announced that the US had agreed to lower tariffs on US$120bn worth of Chinese imports from 15% to 7.5%. In addition, the scheduled 15% tariffs on December 15th 2019 were also removed. However, the 25% tariffs imposed on US$250bn worth of Chinese goods were unchanged. We believe the signing of the ‘Phase one’ deal is positive for Asean countries, due to improved sentiment among manufacturers and exporters on the global trade outlook, as the region has a big trade exposure to both China and US. As of November 2019, in USD terms, Asean’s total trade with China accounted for 18.1% of its total trade while Asean’s total trade with the US accounted for 9.7% of its total trade. In the first eleven months of 2019, the export performance of the Asean-5 countries were weighed down by escalating trade tensions while weaker business sentiment has also weighed on the region’s manufacturing Purchasing Manager’s Index (PMI).

We expect the follow through of the ‘Phase one’ deal and easing trade tensions to be supportive of the region’s trade performance in the short term. However, we believe that uncertainty still remains surrounding the development of trade talks beyond the ‘Phase one’ deal as there is a possibility for a ‘Phase two’ deal to only occur after the Presidential elections in November 2020. This also suggests that, until then, there may no further roll back of tariffs on US$250bn worth of Chinese imports which are currently imposed with tariffs of 25%. Going forward, we believe the trade tensions between the two countries will likely continue until the decision to roll back of earlier tariffs from the US on Chinese imports being addressed.

Source: Affin Hwang Research - 17 Jan 2020