US-China Trade: ‘Phase 1’ trade-deal not a game-changer for the global economy
-
The US and China last night completed ‘phase one' of a bigger trade deal, requiring Chinese purchases of US agricultural goods, some intellectual-property and currency measures and access for US financial services in return for US refraining from next week's planned tariff hike on USD250bn of Chinese goods.
-
The two sides will now have to write down the trade deal over the next three to five weeks possibly followed by a signing ceremony at the APEC meeting 16-17 November.
Chinese media, while noting progress, warned not to be ‘overly optimistic' about the prospects for future negotiations. -
The completion of ‘phase one' of the trade deal could likely boost market confidence further near-term as it removes some uncertainty, but it will not be a game changer for the global economy in our view.
-
Although negotiations of ‘phase two' are expected to commence in November, we still think there are significant hurdles for a more comprehensive deal.
-
In FX markets, the temporary boost in market confidence provides an opportunity to position for further broad dollar strength.
US-China reaches partial deal
Almost 18 months after the US-China trade fight began, the two sides late last night reached a partial trade deal. As part of the deal, China would significantly step up purchases of U.S. agricultural commodities, likely buying about USD 40 to 50 billion worth of products, agree to certain intellectual property measures and concessions related to financial services and the functioning of the Chinese currency market, Trump said Friday at the White House. In return for the Chinese concessions, the US will not implement the planned tariff hike next week.
The agreement is expected to take three to five weeks to put on paper, which will allow the leaders of the two countries to most likely formally sign the agreement at the APEC meeting in Chile on 16-17 November 2019. Importantly, Trump said the deal was the first phase of a broader agreement. Following the signing of ‘phase one' the negotiations of ‘phase two' will begin immediately, according to Trump.
While the trade deal could boost risk sentiment near-term, it will not be a gamechanger for the global economy. Financial markets will breathe a sigh of a relief as the deal removes some of the tail risk of a full-blown trade war between the two sides. On Friday night, US stock markets rose a little more than 1% as rumours spread that the US and China had reached a partial deal, while US yields fell back after increasing immediately after the announcement of the agreement.
However, we do not think the deal will be a major game-changer for the global economy. Although the commitment to buying US agricultural goods was slightly larger than expected, the size of the deal is fairly limited.
Author
Danske Research Team
Danske Bank A/S
Research is part of Danske Bank Markets and operate as Danske Bank's research department. The department monitors financial markets and economic trends of relevance to Danske Bank Markets and its clients.
