With one day to go, markets price a successful signing of the US/China Phase One deal with near certainty. The WSJ reported that China’s Vice Premier Liu He will sign the document in the White House at 1630GMT/1130EST.
The deal’s text is reportedly split into nine chapters, dealing with issues including as intellectual property protections, technology transfers, food and agricultural purchases, financial services, exchange rate and transparency, expanding trade, bilateral evaluation, dispute settlement and a final agreement. Regarding purchases, as we noted earlier in our European Rundown, China has reportedly agreed to purchase $200bln worth of US goods over the next two years; $50bln in energy products, $40bln in agricultural products, $35-40bln in services and $75bln in manufactured products.
Such pledges were met with scepticism by many an analyst. For example, many Chinese refineries are designed to take a heavier form of crude oil than that exported from the US, meaning that meeting the energy import quota might be a challenge. Another concern is that to meet these targets, China may have to reduce imports from other countries, potentially damaging international trading relations.
Commentary out of China so far has suggested they do not share these concerns; an expert affiliated with China’s Minister of Commerce reportedly earlier said that increasing US imports by $100bln per year would “not be very difficult” and would not drive down imports from China’s other trading partners.
Moreover, the Editor of China’s popular state-run tabloid the Global Times, Hu Xijin, said that to the best of his knowledge, “China did make a commitment to expand imports from the US” and that it would be more of a test for the US as to whether they could actually produce all of the goods in question rather than whether or not the Chinese market could consume it.
For currently unknown reasons, the full text of the deal may not be released after the signing tomorrow, an unusual way of doing things in a scenario such as this. Is it not being released because the deal is embarrassing for either the US or China? Or is it not actually finished, as we have been led to believe? Regardless, something will be signed at that appears to be all that matter to markets. And this something, theoretically, should put an end to 18 months of trade war escalation between the two sides.
Naturally then, the focus moving forward will turn to the next stage of negotiations, which according to the US, will get underway straight away. One key thing to note is that Phase two of the deal could happen in its own phases, i.e. 2a, 2b, 2c, US Secretary of State Mnuchin hinted at the end of 2020. Issues on the table this time include the likes of Chinese industrial policies (i.e. industrial subsidies), equal treatment of US and Chinese companies in Chinese market, the removal of non-tariff barriers, a further opening-up of Chinese markets in areas such as internet, data and the overall service sector, and finally a complete roll-back of tariffs.
These issues are seen as much “thornier”, as some pertain to China’s core economic development strategy of the last four decades. Moreover, issues such as the US’ treatment of Huawei, US support of Hong Kong protestors and US freedom of navigation missions in the South China sea could also be points of tension that further complicate the talks.
For this reason, many an analyst is sceptical on the two sides ability to finalise a trade deal in the near future. Indeed, timing itself may also become an issue. US President Trump hinted that he might want to wait until after the election to complete a Phase Two trade deal with China, but Chinese commentators responded by saying that a deal after November would be “too far away”.
However, there are some strong arguments as to why the two sides may be able to finalise a deal in 2020. Firstly, if Trump is polling badly ahead of the election, he may be more inclined to compromise and come across as “the dealmaker”. Currently, he is polling badly in a number of important swing states such as Pennsylvania and Michigan. Similarly, if the US economy continues to slow down, he might jump on the opportunity to make a deal as a means of boosting growth. Economic forces could incentivise the Chinese side to make a deal, although the Chinese economy has shown tentative signs of stabilisation since mid-Q4 19.
What do I personally think? I think the allure of being able to present a full China trade deal to the electorate will ultimately result in the US compromising and going soft on China in order to secure a deal prior to the election. But as Ken reminds us all nearly every day, no one has a crystal ball. There are known unknowns, unknown unknowns and endless ways things could hypothetically play out. As we know, a lot can change in a very short period in the world of international relations and geopolitics and, from a market perspective, a year, nine or even six months is a very long time.
All I know for sure is that there will likely be ups and downs, so trade things as they come and let's all enjoy the ride!