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China to ramp up U.S. buys under trade deal, but skeptics question targets

By David Lawder and Andrea Shalal
FILE PHOTO: A Benjamin Franklin U.S. 100 dollar banknote and a Chinese 100 yuan banknote with late Chinese Chairman Mao Zedong are seen in this picture illustration in Beijing, China

By David Lawder and Andrea Shalal

WASHINGTON (Reuters) - China has pledged to buy almost $80 billion of additional manufactured goods from the United States over the next two years as part of a trade war truce, according to a source, though some U.S. trade experts call it an unrealistic target.

Under the Phase 1 trade deal to be signed on Wednesday in Washington, China would also buy over $50 billion more in energy supplies and boost purchases of U.S. services by about $35 billion over the same period, the source, who was briefed on the deal, told Reuters late on Monday.

The agreement also calls for Chinese purchases of U.S. agricultural goods to increase by some $32 billion over two years, or roughly $16 billion a year, said the source.

When combined with the $24 billion U.S. agricultural export baseline in 2017, the total gets close to the $40 billion annual goal touted earlier by U.S. President Donald Trump.

In total, China pledged to buy $200 billion more in U.S. goods and services over the next two years, while Washington suspended some tariffs that had been due to go into effect and halved others. U.S. duties remain in effect on $360 billion of Chinese imports, about two thirds of the total.

The trade deal does not include an agreement for a future reduction in tariffs on Chinese goods, U.S. Trade Representative Robert Lighthizer and Treasury Secretary Steven Mnuchin said in a statement Tuesday afternoon, refuting a Bloomberg news report.

"There’s no side agreements. The only way the president will be reducing the tariffs is if there is a Phase 2 part of the agreement that is also fully enforceable," Mnuchin told Fox Business Network in a subsequent interview.

Mnuchin said the deal terms would be announced Wednesday, when Trump and Chinese Vice Premier Liu He are slated to sign the agreement at an 11:30 a.m. EST ceremony at the White House, marking a truce after 18 months of tit-for-tat tariffs that have weighed on global growth.

The ceremony comes just as the U.S. Senate prepares to begin its impeachment trial of Trump, only the third U.S. president ever impeached.

China's alleged commitments represent a staggering increase over 2017 imports of U.S. goods and services of $186 billion, raising questions about how realistic they are.

The Chinese translation of the agreement was still under way on Monday, but Mnuchin told Fox Business Network the documents would be released on Wednesday. "Tomorrow we'll be releasing the documents and people will be able to see there's a very detailed dispute resolution process," he said.

U.S. stocks hit intra-day record highs on Tuesday before turning negative on the Bloomberg report, which said the United States would likely maintain the tariffs until after November's presidential election.

U.S. companies have paid $46 billion in tariffs since February 2018.


BEYOND THE FARM

Mnuchin called the deal a "great win" for U.S. companies and farmers and said they stood to gain even more if a Phase 2 deal was reached. He said it would be a "giant week" for Trump given the U.S.-China trade deal signing and expected passage of a new U.S.-Mexico-Canada trade deal by the U.S. Senate.

Despite the truce in the U.S.-China trade war, Lighthizer and his counterparts from Japan and the European Union on Tuesday said they remained concerned about Chinese subsidies that they say are distorting the worldwide economy.

Beijing's subsidies to state-owned firms are expected to be addressed under the Phase 2 U.S.-China trade deal, but it remains unclear when those negotiations will begin.

Senate Democratic leader Chuck Schumer warned Trump in a letter that failing to hammer out a comprehensive agreement that addressed what he called China's "rapacious trade behaviors" would harm U.S. workers and companies for years to come.

He told reporters that China was the real winner in the trade deal, saying there was "no real certainty" that Beijing would buy more U.S. soybeans since it had signed long-term contracts to buy soybeans from Argentina and Brazil.

Two other sources familiar with the Phase 1 trade deal confirmed the rough breakdown of energy and manufacturing purchases, without providing specific numbers.

The $32 billion agriculture increase over 2017 was confirmed by Myron Brilliant, a senior U.S. Chamber of Commerce official, who spoke to reporters on Monday in Beijing.

Analysts and traders doubt whether China could absorb such a big increase in commodity purchases, and said relying so heavily on U.S. goods raised concerns about price and supply risks.

Trump has heralded the expected Chinese farm purchases, keen to support a major Republican political constituency that has been battered by Chinese retaliatory tariffs.


MANUFACTURING CHALLENGES

The boost in manufactured goods includes significant purchases of autos, auto parts, aircraft, agricultural machinery, medical devices and semiconductors, said one of the sources, without naming any specific suppliers.

The aircraft would likely be built by Boeing Co, the No. 1 U.S. exporter, whose new sales to China have ground to a halt over the past two years.

One of the sources who expressed skepticism about the manufacturing target noted the U.S.-China trade deal does not address non-tariff barriers that have kept these U.S. goods out of the Chinese market for decades, such as procurement rules, product standards and subsidies to Chinese state-owned firms.

Chinese car sales have been flagging and excess domestic assembly capacity rising, making purchases of significantly more U.S.-built cars unlikely. Among the most popular U.S.-built vehicles sold in China are BMW and Mercedes-Benz sport-utility vehicles.

Many economists and experts are dubious about enforcement of the Phase 1 agreement.

The deal allows Washington to reinstate tariffs on Chinese goods if it cannot resolve a claim of Chinese non-compliance, but nothing would preclude China from retaliating, people familiar with the deal said.

Oil traders and analysts were also doubtful whether China would be able to purchase an extra $50 billion of energy products, including crude oil, liquefied natural gas and imports of petrochemical raw materials such as ethane and liquefied petroleum gas.


(Reporting by David Lawder and Andrea Shalal; Additional reporting by Susan Cornwell in Washington, Gabriel Crossley and Hallie Gu in Beijing, and Florence Tan in Singapore; Editing by Howard Goller and Leslie Adler)