What does the Phase 1 Trade deal between the U.S & China entail?
The details revealed point to a cautiously optimistic approach by the United States and a bumpy road ahead
Although it feels like a ‘Trump Presidency phenomenon’, the trade war between the two biggest economies of the World was in the making for quite a while. Over the years, the West, especially the United States had been blaming China for manipulating its currency, erecting barriers to business entry in the country, forcing technology transfers & not cracking down on intellectual property theft to name a prominent few.
The issue blew wide open once the current U.S administration came to power in 2017. The resulting economic hostilities kicked off in Mar. 2018 when the U.S imposed tariffs on imported goods like Steel, Aluminum & Solar panels, etc. This kick-started a tit for tat response from the Chinese authorities. We are not going to get into the details of all the tariffs but a timeline of all these events is provided in the chart above.
For the next two years, the financial markets & the global economy suffered from the uncertainty created by this trade war. Many started to believe that we might reverse all the gains made towards a global free-market economy. The U.S market, perhaps, weathered the jitters, best of all. The record-breaking performance of American equities gave it some leverage to push the tussle towards resolution on its terms.
The long winding road has finally led to the signing of a partial trade deal today between the American President & Chinese Vice Premier today. The 94-page document highlights the sticking points of this deal, the most important of which is China’s promise to increase the purchase of at least $200 billion of U.S goods, over the next two years.
According to a Politico report, these goods may include $75 billion worth of manufactured goods, $50 billion worth of energy, $40 billion in agriculture and $35 billion to $40 billion in services.
“Righting the wrongs of the past and delivering a future of economic justice and security for American workers, farmers & families.” ~ President Trump
“Good for China, for the U.S. and for the whole world, in the next step, the two sides need to implement the agreement in earnest.” ~ President Xi Jinping
The biggest measure of the impact of this trade war has been the trade surpluses and deficits between China and the U.S. China’s trade surplus with the U.S. dropped to $295.8 billion in 2019, compared with a record surplus of $323.3 billion in 2018 (Figure 1). China’s 12.5% decline in exports to the U.S. in 2019 narrowed the U.S. deficit even more. Chinese imports from the U.S. fell nearly 21% after it imposed retaliatory tariffs & directed its state-owned companies not to buy American goods.
Coming back to the deal — In return for Chinese promise to buy more U.S goods, the latter would scrap a new round of tariffs and cut existing duties on $120 billion in products to 7.5%. The U.S, however, intends to keep the 25% tariffs on $250 billion in Chinese products in place until it can see some enforceable actions from China. Pretty evident that we are not going to see a Phase 2 trade deal before the next U.S general elections.
A fact sheet released by the USTR summarizes the main issues sort to be addressed by both the countries after the signing of the deal.
- Intellectual Property: Put an action plan within 30 days for the protection of intellectual property against pirated and counterfeit goods.
- Technology Transfer: China will stop pressuring foreign companies to transfer their technology to domestic companies as a precursor to obtaining market access. Technology transfers, if any, should be voluntary & based on mutual agreement.
- Agriculture: This part of the agreement outlines the massive increase in agricultural exports & services to China.
- Financial Services: Opening up the Chinese sector to U.S. providers of a wide range of financial services, for example, foreign equity limits.
- Currency: A long-standing issue that would refrain China from devaluating its currency to gain a competitive trade advantage.
- Expanding Trade: This includes commitments from China to import $200 billion more of various U.S. goods & services over the next two years.
- Dispute Resolution: The agreement also includes setting up of a dispute resolution system.
It remains to be seen, how both countries will enforce the terms of the agreement to prevent further tensions. With an election year and accompanying Phase 2 uncertainty, investors better buckle up.