Coronavirus could lead to renegotiation of US-China trade deal

Coronavirus could lead to renegotiation of US-China trade deal

COVID trade deal

With spring planting just weeks away and the COVID-19 pandemic tightening its grip on the global economy, farmers are wondering how the virus might impact the terms of the U.S.-China trade deal.

The United States and China reached agreement on Phase One of a new trade deal late last year, but with spring planting just weeks away and the COVID-19 pandemic tightening its grip on the global economy, farmers are wondering what to expect in the marketplace and how it might impact the terms of the trade deal.

Based on the terms of the agreement, China agreed to buy $12.5 billion in U.S. agricultural products in 2020, and $19.5 billion more in 2021. However, recent world events have caused uncertainty as to when those shipments will begin, and whether the targets will be met.

So far, and understandably, the deal has yet to produce an increase in demand for U.S. agriculture products. What does the COVID-19 pandemic mean for the U.S.-China trade deal? The truth is, nobody knows, yet.

“Here is what we do know. In the trade agreement, there are clauses in multiple areas,” said Frayne Olson, NDSU Extension crops economist/marketing specialist. “Because the agreement laid out a lot of new relations – guidelines on how we’re going to trade back and forth – like any contract, you can’t anticipate all the issues and problems caused by things going on.”

Within the agreement, a procedure is laid out for both the U.S. and Chinese negotiators to meet on a regular basis to work through the mechanics of implementing the agreement, according to Olson.

“There are clauses built into the agreement in case something unforeseen happens, either on the U.S. side or the Chinese side, which would cause the need to adjust the agreement,” he said. “There’s a process in place to work through that. So far, there has been no formal announcement from either side saying, “Yes, we’ve got to go into that mode.”

Now that coronavirus is on the U.S. side, as well as the Chinese side, the question is whether or not there is a scenario where China drops out of the deal all together. Olson doesn’t foresee a situation where China “backs out” of the deal, but instead he sees the two sides potentially needing to modify the agreement to compensate for the current conditions.

“I have not heard of any discussion, yet, about going into any renegotiation mode to amend the base agreement,” he said. “Personally, as an observation, I would not be surprised if we do that, just because of the severity of the pandemic and the implications for both the U.S. and Chinese economies.”

When it comes to the agriculture provisions in the agreement, Olson says it’s important to understand China agreed to significantly increase their purchase of U.S. products, and agriculture was just one of those buckets. Other areas include: energy, manufactured goods and services.

“In my view, in my opinion, for China to meet the dollar amounts for the increase in agriculture purchases, it’s still possible,” he said. “It’s getting more difficult as time goes by, but it’s possible. To meet the targets for manufactured goods, energy products and services is going to be much more difficult because the dollar volumes are much higher. The bottom line is we don’t know.”

To his knowledge, Olson has yet to hear about any formal requests on either side to make amendments or changes to those targets, and he wanted to stress that those amendments don’t mean they’ll drop to zero.

“All it means is they’ll renegotiate those targets and try and come up with a new target that’s more realistic than the original agreement. I want to be really clear, there’s a thought out there that because there’s an Act of God that this contract could be null and void, and that’s not the case. All the agreement says is that they’ll renegotiate, and that’s what the expectations are,” Olson concluded.

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