China cuts tariffs on $75 billion in U.S. imports as coronavirus keeps it in lockdown

The phase one agreement signed last month quelled the protracted trade conflict that tied up the world's two most powerful economies, imperiled global growth and caused chaos for multinational corporations. The terms required both nations to de-escalate tariffs, and compelled China to buy an additional $200 billion in American goods over the next two years.

Levies will be slashed from 10% to 5% or from 5% to 2.5% on hundreds of U.S. products starting Feb. 14, China's finance ministry said. The tariffs on cars, oil, soybeans and other goods date back to September and had been implemented in response to additional tariffs the U.S. had applied in the fall.

The widely expected move comes as China is paralyzed by the coronavirus, which has infected more than 28,000 in the mainland and killed more than 500. It has also brought China's powerful manufacturing industry to a standstill, as travel restrictions freeze China's workforce and major companies such as Boeing, Apple and Nike have been forced to close factories until at least mid-February. McDonald's, Starbucks, KFC, Levi Strauss, H & M and Samsung have closed stores across China. Casinos in Macao, the world's biggest gambling market, are shutting down for two weeks.

"The recent cut in Chinese tariffs is more about containing the economic damage to China from the coronavirus than it is about trade relations between the two countries," Brad McMillan, Chief Investment Officer for Commonwealth Financial Network, said in commentary Thursday. "Along with the recent moves by the PBOC to inject money to protect their markets, this is aimed at managing the risk."

China is the world's leading oil consumer, and the country's lockdown has sent shock waves through crude markets. Brent crude prices hit a one-year low earlier this week, and BP has warned the virus could reduce global oil demand by as much as 80% this year. OPEC and its allies have been meeting to discuss oil output in the face of declining demand.

Even if the virus is contained soon, economists are predicting China's growth rate will fall to between 3% and 4% this quarter.

"Reducing tariffs and importing more food from the U.S. makes a lot of sense for the Chinese. The Chinese government is facing a number of homegrown problems, the major one being the outbreak of the coronavirus," said Ed Yardeni, president of Yardeni Research. "They are clearly in need of importing more food. The swine flu epidemic last year decimated their pork supply. Now there is evidence their chickens are facing a virus. They need our food. Food inflation is soaring in China. There have also been disruptions in their transportation system, further complicating the food supply."

China's ministry of agriculture and rural affairs announced an outbreak of the highly pathogenic H5N1 virus that wiped out 4,500 birds on a poultry farm in the Hunan province earlier this week. The World Health Organization said the virus "does not infect humans easily" and that the person-to-person spread is unusual. But H5N1 compounds dangers for China's poultry industry, as the coronavirus has made it difficult for farmers to receive chicken feed. Hubei poultry farmers said they were "very distressed" about the situation in a letter to the China Animal Agriculture Association last week.

Experts are skeptical about China's ability to deliver on the additional $200 billion in American purchases it is supposed to make, and the likelihood seems slimmer given the outbreak. But the pact includes a disaster clause which allows for some leniency in the event of a crisis like the coronavirus. The U.S. is slated to follow suit and cut tariffs on certain Chinese imports from 15% to 7.5%, also on Feb. 14.

In an interview with Fox Business earlier this week, White House National Economic Council director Larry Kudlow acknowledged that the outbreak could delay China's purchases. But he said the effect on the U.S. economy would be minor.

"We're just trying to help China right now," Kudlow said Tuesday. "It's not going to be that big a deal for us."

China has agreed to buy an additional $76.7 billion in U.S. goods and services in the first year of the deal - a 41% jump from the $187.5 billion it spent in 2017, according to the office of the U.S. trade representative. The Chinese have agreed to dollar targets for services, as well as for farm goods, energy products and manufactured goods. New sales for American farmers alone are expected to near $40 billion in the first year, up from $24 billion.

U.S. Agriculture Secretary Sonny Perdue said Wednesday that the U.S. should be patient with China if it struggles to hit these targets amid the outbreak, Reuters reported.

"If they're really trying and it really just blows the economy out of the water, then we would have to be understanding of that," Perdue said, speaking to reporters at a cattle convention in Texas."

Farmers were among those hit hardest by the trade war, and the U.S. government has tried to stem the losses with a $28 billion bailout. American farm bankruptcies jumped 20% in 2019, hitting an eight-year high, according to recent analysis from the American Farm Bureau.

Fresh data from the Commerce Department on Wednesday showed that the U.S. trade deficit with China narrowed in 2019 for the first time in three years, as both nations slapped tariffs on hundreds of billions of dollars worth of imports. The deficit with China fell $73.9 billion to $345.6 billion last year.

"China hopes that both sides will abide by bilateral agreements and make an effort to implement relevant provisions so that we can boost market confidence, promote bilateral trade relations and global economic growth," China's State Council Tariff Commission said in a statement.

The sign of de-escalation lifted overseas markets, with Hong Kong's Hang Seng Index closing up 2.5% and Europe's benchmark Stoxx 600 index on track for its best week of trading since 2016. But Wall Street, which has been on a tear all week, seemed to shrug, with the Dow Jones industrial average flat in early trading.