The phase-one trade deal was finally signed this week, with little market impact in the short-term.
Longer-term it could have significant impact on global trade and the global economy. So what was actually agreed?
Perhaps most significant was the China pledge to import $200bn of US goods. Some of the additional tariffs have also been halved by the US. Focus now shifts to phase two and whether China can keep its promises.
Risk markets have a slight positive tone to start Thursday’s session with US futures in the green and the UK’s FTSE slightly higher at 7445, only 20 points below the December high. Currencies are mostly flat with the British Pound recovering slightly after a recent bout of weakness on poor data and fears the BoE may cut rates as early as the January meeting. GBPUSD has popped back above 1.3 while EURGBP faded from 0.86.
Wednesday’s big news was of course the signing of the phase-one trade deal between the US and China. This was not really a market moving event since it has been well known by markets for several months, although there might have been some sighs of relief that pen was finally put to paper. We also got the first proper looks at what the deal actually covers in its 86 pages. Here’s Danske Bank with some of the details,
“The bulk of the deal was known in advance - notably that new tariffs will not come into play - but more details on China's buying of US goods were announced (although some of this had also been leaked in recent days). Also, a pledge not to engage in competitive devaluation was included in the deal alongside stricter rules on intellectual property rights. In terms of China buying US goods, we learned that US annual exports to China are set to rise by around USD200bn over 2020 and 2021. Of this, some 20% are set to come from agricultural goods, 40% from manufacturing, and the remainder from energy and services.”
This all seems positive and should benefit global trade, especially in the US sectors named above. However, not all area could get a lift and Dankse Bank notes, “for Europe the deal is a mixed outcome: on the one hand, it could be a drag on EU exports to China now that the latter is forced to source more goods from the US. On the other, Europe will benefit from stricter rules on intellectual property.”
The other concern is that the deal does not roll back all the US tariffs implemented since the trade war began, although it does pledge to halve (to 7.5%) the additional tariffs on US$120bn worth of imports from China. Tariffs have been a drag on the global economy and could continue to be so as the remaining imports won’t be lifted until the phase two agreement. Progress in the next phase relies heavily on China fulfilling the promises laid out in phase one and these are quite considerable. Perhaps they even ask too much vice-Premier Liu commented that the import commitments are dependent on Chinese demand, which seems at odds with the exact amounts specified in the text.
Foreign exchange market impact to the specifics of the deal has been almost non-existent but of course risk markets have been busily pricing in the deal since early Q4 last year. Currencies have had a muted response and the US dollar has slowly climbed up from the low made on 31st December. In theory the deal should be good for the US economy as it supports it in several ways; imports will get cheaper and exports should increase. It should also be good for the US dollar, but this is not something either President Trump or the Fed want so they will likely work to keep it subdued.