US-China trade: a cautious note on the phase-one deal

US and China both announced on Friday that a phase-one deal had been reached, which marked a shift from escalation to de-escalation.
While this is good news, the unorthodox process of the announcement and the mixed signals from each side suggest that things are not smooth behind the scene.
The next thing to watch for is the finalisation of the legal text and signing in early January. Then the two sides move on to phase-two, which will prove more difficult.
With the US election getting closer, however, we do not expect to see another round of escalation in 2020. But we should expect some bumps on the road, still.

Roll-back of tariffs marks important shift

As we highlighted in our China Weekly Letter on Friday (13.12.19), the most important thing that happened with the phase-one deal was that we have moved from a 1― year long period of escalation to de-escalation (for an overview of the deal see box on page 3). This was a key assumption behind our expectation of a moderate global recovery in 2020. With the main potential trigger for a global recession in 2020 off the table, the clouds are starting to lift and the rays of light we pointed to in our Big Picture outlook earlier this month can shine through. This is further underpinned by the lower risk from Brexit as well.

Escalation behind us but bumps on the road should be expected

While this is all good news, there are a few things about the process and the lack of detail that suggest there are still difficulties behind the scene in the US-China trade talks.

First, the process of announcing the phase-one deal was quite unorthodox and seemed very uncoordinated. It all started with a Trump tweet on Thursday about US and China being very close to a big deal, followed by sources close to the talks stating that a phase-one deal had been reached. However, China was silent about this throughout Friday until they did a late night press conference (Beijing time) where they confirmed a deal had been reached.

Second, it is unusual to announce a deal before it has been completed with all legal text that both sides have agreed to. It adds to the sense that it was not coordinated.

Third, in one quite crucial area the two sides sent conflicting signals. Chinese Vice-minister of Commerce Wang Shouwen said "removing tariffs is the core concern of China " and that the phase one deal included a removal of tariffs in stages . However, in a statement shortly after, the US Trade Representative announced that there would be only one tariff reduction from 15% to 7―% on USD120bn of Chinese imports. And US Trade Representative Robert Lighthizer said later that the US had not promised a future roll-back of tariffs and added that it would be wise to be sceptical on whether China would deliver on certain agreements.

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