The US and China sign historic trade deal

Market reaction to the US-China trade deal signed in Washington today has been priced for several weeks. The next phase will be determined by the economic performance of the two countries as they implement the terms of the accord.  

The preliminary currency moves are complete.  The Treasury Department has removed China’s designation as a currency manipulator and the People’s Bank of China has revalued the yuan 4% higher against the dollar since its more than ten-year low on September 3^rd.   Both moves are the first steps to the much more complex new relationship spelled out in the accord.

USD/CNY

This  phase one agreement attempts to reorder the trade and financial relations between the world’s largest economies. It was sought by the United States who demanded recognition that China had grown, in size and expertise far beyond the era when she needed assistance to join the modern world.

Terms of the deal are spelled out in the 94 page text but the outlines of the pact have been known for several weeks. They include a suspension of planned US tariffs on $156 billion of previously untaxed Chinese consumer goods that had been scheduled for October 15^th, an increase in China’s purchases of American farm products by about $32 billion, new energy exports from the US worth some $50 billion, manufactured items by $80 billion and services by $35 billion. The US will also cut in half the existing duties of 15% on roughly $120 billion of Chinese exports that had been levied on September 1^st.

Tariffs will remain on approximately $360 billion of yearly Chinese exports to the US.  President Trump said in the press conference prior to signing that these tariffs will all be removed when a phase two deal is completed.

These commitments will play out over the next two years as will the Chinese promises to remove the requirements for technology transfer, improve protections for intellectual property and eliminate ownership restrictions that have been in place since China opened to the world a generation ago.

The trade war between the China and the US roiled global market for almost two years and threatened to drag the world economy into recession.  Its impact was felt in both countries as Chinese GDP fell to its lowest expansion in the modern era and US growth fell by a third, manufacturing slipped into recession and job creation in the factory sector dropped by almost 80%.

China GDP

FXStreet

In many ways the success of this deal rests in the business communities of both countries.  Markets will judge the impact as the Chinese and US economies respond to the terms of the agreement in the first and second quarters.  

Initially it will be easier to evaluate the performance of China as the agricultural and energy purchases promised in the accord are under the control of the government.  The deal should also lift the pall that has lain over the global economy and liberate investment spending that has been inhibited by the spectre, however unlikely, of a full-fledged trade war.

American industry has been as reluctant as the rest of the world to invest in new equipment and capacity over the past year.  The combined jump in business investment in durable goods of 1.2% in November and December may be an indication that the trade deal has indeed liberated industry pocketbooks.

Nondefense Capital Goods Orders excluding Aircraft

FXStreet

The trade deal is an historic achievement for both countries and for President’s Donald Trump and Xi Jinping but its success is no longer in their hands.