economy oil trade

Sorry Mr. Trump, But China Is Going To Need Some ‘Leniency’ On All That Stuff They Promised To Buy

It's a "disaster". And an "unforeseeable event".

Last week, I wondered if the coronavirus epidemic would imperil the Sino-US trade pact before the ink is even dry.

On Monday morning, I wondered again.

“The trade talks and the epidemic could soon become entangled, just as national security and trade became inextricably bound up last year”, quoth me. And then, this:

The Trump administration will claim the two are entirely separate issues, but remember: They said the same thing about national security and trade and those two things hardly remained “separate”.

Just hours later, Bloomberg reported that officials in Beijing are “hoping” the Trump administration will acquiesce to “flexibility” on promises made in conjunction with the “Phase One” trade deal, which was signed last month after a truly absurd press conference at the White House.

The relevant section from the deal (which you can read in full here) includes the following language on Beijing’s commitments to purchase a variety of goods from the US:

During the two-year period from January 1, 2020 through December 31, 2021, China shall ensure that purchases and imports into China from the U.S. of the manufactured goods, agricultural goods, energy products, and services identified in Annex 6.1 exceed the corresponding 2017 baseline amount by no less than $200 billion.

Among other things, China is supposed to buy $52.4 billion additional US energy products (including LNG, oil and coal) over 2020-2021, including $18.5 billion in 2020 and $33.9 billion in 2021. As for farm products, Beijing committed to purchase an additional $32 billion over the two-year period, including $12.5 billion in 2020 and $19.5 billion in 2021.

All told, purchases in year one were supposed to total nearly $77 billion above the 2017 baseline.

To be sure, US officials have begun pondering the prospect that China will not be able to hit the targets.

“[The virus] obviously is going to have some ramifications economy-wide, which we hope will not inhibit the purchase goal that we have for this year”, Agriculture Secretary Sonny Perdue said last week, on a conference call from Rome. “We’ll have to look ahead and see. But the honest answer is we just don’t know yet. But we’re hoping for a very quick conclusion”.

On Monday, Department of Energy assistant secretary for fossil fuels, Steven Winberg, told Bloomberg TV the spread of the virus could delay the realization of the benefits from the deal. China’s oil demand dove recently by around 3 million barrels/day, amounting to 20% of total consumption, Bloomberg reported late last week, citing “people with inside knowledge of the country’s energy industry”.
Clearly, that is a problem for global demand. Oil obviously plunged in January, posting its worst start to a year since 1991. Shorts are piling on and OPEC is pondering what – if anything – to do.

Brent has erased a year’s worth of gains. On Monday, during the harrowing reopen after the holiday break, Chinese equities did the same.

It’s against that backdrop that Beijing is poised to ask for leniency from Trump when it comes to making good on the trade deal promises.

Or at least according to Bloomberg, who reminds you that the “Phase One” deal “has a clause that states the US and China will consult ‘in the event that a natural disaster or other unforeseeable event’ delays either from complying with the agreement”.

Suffice to say the virus outbreak qualifies as both a “disaster” and an “unforeseeable event”.

Now, let’s see if Trump is in a benevolent mood, and whether administration officials were telling the truth to suggest the epidemic and the trade deal can, in fact, be kept totally separate.


 

 

4 comments on “Sorry Mr. Trump, But China Is Going To Need Some ‘Leniency’ On All That Stuff They Promised To Buy

  1. PS — Erasing a year’s worth of gains would cost the S&P 16% of its current value and 24% off QQQ.

  2. It is something I have been wondering about since the news of the spread of this virus hit. It isn’t going to play well in Trump Country that is for sure, but I am not sure what the administration can do about it besides screaming and threatening.

    • They can try throwing actual punches… he could say, well then burn the deal and I’ll implement the full array of tariff’s I planned then in a fit of rage hit Europe just for the fun of it.

      • The trade war is likely to flare up in the longer term regardless of extenuating circumstances.

        The Trump administration is not going to fan those flames, however until after the election. Trump already has the PR benefit from the deal to show his supporters. The last thing the president would wish to do as 2020 progresses is roil markets. Not merely because politicians never want to make the electorate feel poorer as they head to the polls but also because Trump has made stock market performance the bellwether of his economic performance.

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