Donald Trump’s “phase-one” trade deal with China, signed January 15, promises to alleviate trade tensions that have been escalating between the United States and China since 2017. In the deal, the United States agreed to gradually cut tariffs on select Chinese goods, including a decrease from 15 percent to 7.5 percent on $120 billion worth of Chinese goods set in 2019. Both China and the United States planned new tariffs that were set to go into effect at the end of the year, however, these were canceled in response to the phase-one deal, decreasing the level of uncertainty around U.S.-China trade relations and increasing investors’ confidence in markets across the globe.
China has agreed to increase its purchase of U.S. agricultural products and aims to import $200 billion worth of American goods in the next two years. The plan states that $76.7 billion will be imported in 2020 and $123.3 billion in 2021—it is important to note that the pre-trade war exchange level was $134 billion.
This agreement certainly sounds like an improvement to the current state of trade tensions between China and the United States, particularly as the stock market hit record highs at the end of 2019. However, analysts are skeptical about the long-term feasibility of the deal. Many think that the $200 billion promise of U.S. imports flowing into China—which Trump is touting as one of the main victories of the deal as he launches his re-election campaign—is extremely unrealistic. The phase one deal also has a “snap back” provision on U.S. agricultural imports, meaning that if China falls short on buying the agreed import level of agricultural products, the U.S. is free to reinstate tariffs.
In an attempt to reach this $200 billion import level, political economists believe China will shift its purchasing from other countries in favor of the United States. While hitting this target may benefit the U.S. trade deficit, it will cause some level of harm to developing countries. Angola, the Republic of Congo, and Mongolia—with roughly 50 percent of their exports going to China—are most exposed and likely to be harmed by the “phase-one” deal.
U.S.-China trade deal and Latin America
The trade war between China and the United States gave Latin America a chance to revamp its export market. In fact, countries like Brazil and Argentina did benefit from exporting a large quantity of soybeans to China after China stopped buying from U.S. farmers. However, Brazil is likely to be affected by the trade deal’s agricultural component, which allows the United States to bring back tariffs if China fails to hit the agreed target.
But although the region was not expecting this fight between the world’s largest economies to last for too long, the shifting dynamics of the U.S.-China trade relationship do have secondary effects that Latin American markets must balance and overcome in the long-term. For instance, if China continues to suffer from the imposition of both commodity-specific and broad-based tariffs, it will negatively affect regions with natural resource wealth. Countries relying on oil or mineral exports, like Latin America, would suffer. Second, the conflict will no doubt injure every aspect of the economy in Latin America, directly or indirectly pushing for trade reduction, financial market depression, and currency depreciation.
What is even more worrying is that events that affect the global economy have the power to transform political realities, and even topple governments. The United States has expressed concern about China’s influence in Latin America. It will be a complex scenario if the bilateral tensions between the United States and China continues, and the Latin American relations between these two countries turns into a “choose between east or west” dynamic.
With the new “phase-one” trade deal signed between the United States and China, it’s hard to say whether the alleviation of the trade war will benefit the region or not. Latin American markets—such as Brazil, which is also undergoing a major economic reform—may suffer from a temporary trade slowdown. Brazil surpassed the United States as the largest soybean producer in the world in 2019 thanks to Chinese purchases. Yet, its accumulated inventory might in turn hurt local farmers this year, with China promising to import more U.S. agricultural products. However, if the two giants gradually moderate trade tensions, the region can better plan and produce with an economic recovery in sight.
Nicolás Albertoni, is a PhD candidate in Political Science and International Relations at the University of Southern California. He is the Trade Policy Project´s Principal Investigator at the Security and Political Economy Lab (SPECLab) at USC.
Emily Heuring, is the team coordinator and research assistant of the Trade Policy Project at the USC SPECLab. She is a student from USC studying Business and Economics.
Haoliang (Leo) Chu, is an external collaborator of the Trade Policy Project at the USC SPECLab. He is a master’s student in Economics.