Daily Management Review

US-China trade deal at risk due to Hong Kong protest


Chinese state-owned companies have suspended purchases of American food in response to Washington’s decision to strip Hong Kong of its privileged bilateral trade status. Further development of this conflict may result in a rupture of the first part of the trade deal between the United States and China, concluded in January this year after complex and lengthy negotiations. A new aggravation of the relations between the PRC and the USA is taking place against the backdrop of a deepening recession in world trade.

Mikki Sprenkle
Mikki Sprenkle
Chinese state-owned companies received instructions from the PRC authorities to stop purchase of pork and soybeans from the United States as part of the first phase of a two-country deal, Reuters and Bloomberg reported yesterday, citing sources. The reason for this step was the measures taken by Washington in connection with the approval by the All-China People's Congress (the highest legislative body of the PRC) of a resolution on a law on national security in Hong Kong.

On May 29, Donald Trump announced that the United States would deprive Hong Kong of its privileged status and economic benefits since Beijing’s actions now cease to be a separate part of the PRC. “We will begin to consider the rejection of a number of privileges,” the American president said then. “We are talking about export control, the use of dual-use technologies, as well as the customs clearance of goods (now the United States consider Hong Kong as a customs territory separate from mainland China). Donald Trump also announced imposition of sanctions against officials of China and Hong Kong, who, according to Washington, are “directly or indirectly involved” in infringing on the autonomy of this Special Administrative Region of the PRC.

The current refusal to purchase American food may lead to the collapse of the trade deal between the United States and China, concluded in January this year. Under its terms, China is supposed to increase the volume of purchases in exchange for Washington’s refusal to hold the last round of tariffs and halve (to 7.5%) the tariff for part of Chinese imports in the amount of $ 112 billion. In January, China promised to increase imports from the United States in the next two years compared with the level of 2017 (then the supply of goods amounted to $ 130 billion, services - $ 56 billion). First of all, this implies an increase in energy imports of about $ 50 billion in two years, engineering products - $ 80 billion, services - $ 35 billion, agricultural products - $ 32 billion. According to the US Ministry of Agriculture, in the first quarter of 2020, China bought $ 1 billion soybeans and $ 691 million pork from the United States. 

Note that the direct impact of changing Hong Kong status on trade with the United States will not be so great - in 2019, Hong Kong exports (in fact, re-exports from China) to the United States have already decreased by 15% (to $ 39 billion), and imports - by 8 % (up to $ 27.3 billion). As indicated by ING Bank, the restriction on the transfer of American technology and the spread of "export control" to Hong Kong, especially in terms of dual-use technologies, will be more sensitive.

New contradictions in bilateral relations between the PRC and the USA have arisen amid a deepening recession in world trade. According to the World Bank, global exports in March 2020 decreased by 11.9% year-on-year. At the same time, the correlation between trade volumes and the presence of quarantine measures in one country or another turned out to be weak, which indicates a globalization of the recession. In particular, although China has already recovered in April (growth was 3.5% year-on-year), imports remained below last year's figures - minus 14.7%.

source: reuters.com, forbes.com