The US and China finally signed and published the details of the US-China phase one deal. Is it worth the all the fuss?
The most repeated part of the deal is China agreeing to increase its imports from the US by US$200bn in two years’ time. The question is whether it is really feasible to create additional demand for US goods equal to US$150 per Chinese citizen over the next two years. Especially as the growth of the Chinese economy is structurally on a downward trend and authorities want to continue the fifteen-year trend of declining import growth.
Furthermore, President Trump pledged during the ceremony to halve the additional tariffs it imposed as part of the trade war to 7.5 percentage points on some US$120bn worth of imports from China. The remaining imports won’t be lifted until the phase two agreement. However, the noting of this is stated in the official trade deal text.
The agreement by the Chinese to import US$200bn of US goods will be met, in part, by China’s commitment to import and raise total agricultural imports to US$40bn to US$50bn, US$50bn of energy products and US$75bn of manufactured products. Comments by vice-Premier Liu that these commitments are dependent on Chinese demand seem at odds with the English version of the official text published by the US trade representative which specifies the exact amounts. However, the agreement does not include an enforcement clause addressing the purchasing commitments by China. In addition, the text explicitly states that the purchases are dependent on commercial considerations.
Unless Chinese demand for US agricultural goods and energy rises drastically, China would have to use state policy to substitute agricutural and energy imports from other exporting nations with imports from the US. This would lead to lower prices in those other agricultural and energy exporters, and therefore make it for more attractive for third countries to shift away from US suppliers and import soybeans and coal from, eg, Brazil instead. Thus, higher exports to China will probably, in part, be offset by lower US exports to the rest of the world. These adjustments would likely be more gradual than the immediate impact of increased demand from China. Therefore increased demand from China would support some economic growth over the upcoming year.
Some of the structural reforms included in the deal address the protection of American intellectual property and access to the Chinese financial services sector for foreign firms. Some of these reforms were already addressed, in an earlier intellectual property reform The most difficult topics such as Chinese industrial subsidies are pushed to a phase two deal, which we do not expect before the US elections in November. At least the deal takes away some of the trade uncertainty that affected businesses in the past two years.
Read the original analysis: The US-China trade phase one deal, What’s it worth?
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