Why The "Phase One" Trade Deal Is Impossible, In One Chart

Last Friday, in oddly mis-coordinated announcements, the US and China announced that the two nations had reached the long-awaited 'Phase One' trade deal, as a result of which the US would not implement the Dec 15 tariff and would roll back the latest round of September tariffs by half, from 15% to 7.5%, while in return China promised a "best effort" to purchase $40 billion in agricultural products from the US. There is just one problem with this arrangement: as we first noted last week, it will never happen, and here's why.

Assuming a similar export mix as in 2017, this would translate into an unprecedented 235% volumetric increase in 2020 US agricultural exports to China over 2019, according to Goldman Sachs. The problem is that while US exports to China had declined sharply in 2018, other nations stepped in, in many cases with long-term bilateral contracts in place ensuring the long-term delivery of ag products from mostly Latin American substitute markets. This, as Goldman points out, means that such an increase in Chinese purchases from the US "would likely be hugely disruptive to global agriculture markets, primarily crowding out Argentine and Brazilian supplies that have taken substantial market share since 2017 due to the trade war and much weaker currencies."

To get a sense of just how improbable such a surge in Chinese imports from the US is, here is a visual representation of what this "disruptive increase" in US agri exports to China would look like...

... and also why the assumption in exported quantities to China is, as Goldman points out, thoroughly "unreaslitic."

Therefore, it is only a matter of time before officials, markets and farmers all realize that the terms of Phase One are unreachable, and the US admin will have no choice but to resort to a new round of tariffs. Which explains the veiled threat from Wilbur Ross earlier today, who said that the US "could add" tariffs if China doesn't uphold the trade deal.


Since it is an absolute certainty that China won't uphold the trade deal, the real question is when will Trump announce that China has failed to live by the agreement. Considering that Trump will need a market boost heading into November, it would mean that a new tariff threat will likely have to be unveiled at least several months ahead of time, only for Trump to fold again shortly before November 2020, unleashing another "trade optimism" relief rally.