A “phase one” trade deal between the United States and China, announced Friday, has cleared the path for riskier assets to rally through the end of the year.
But investors are still digesting what is and isn’t included in the deal, which lowers the temperature after a fraught year and a half but leaves markets in the dark on what comes next.
“The [‘phase one’] trade deal is positive for the outlook relative to continued trade war escalation, but there is still a lot of uncertainty,” Jim O’Sullivan, chief US macro strategist at TD Securities, said in a note to clients.
The deal still needs to go through a legal review and translation process before it’s signed. But here’s what it includes, according to US officials and others familiar with the agreement:
The United States canceled an additional round of tariffs on nearly $160 billion of Chinese consumer electronics and toys which had been set to take effect Sunday.China has agreed to increase purchases of US goods and services by at least $200 billion over the next two years. That includes $40 billion to $50 billion in farm commitments.The United States has agreed to cut tariffs on $120 billion worth of Chinese imports enacted in September to 7.5% from 15%. Earlier tariffs of 25% on $250 billion in Chinese imports remain in place.China is said to have agreed to make structural changes to how it deals with intellectual property rights, and will end the practice of forcing American companies to hand off their technology to access the Chinese market. However, details here remain unclear.
Analysts on Wall Street are cheering the agreement as slightly better than they had expected, though there’s some disappointment that the tariff rollbacks didn’t go further.
“Before Trump coined the term ‘phase one,’ we would have described such an agreement as a substantial deal rather than a mere truce,” said Holger Schmieding, chief economist at Berenberg.
That said, there’s already chatter about whether the de-escalation can last — especially considering China’s ambitious commitment to significantly boost agricultural purchases.
“Given the peak level of China’s agricultural orders from the US was at $28.7 [billion] per year in 2012 and 2014, an annualized $40 [billion or more] order would be difficult, but perhaps not impossible,” Bank of America’s team of China economists wrote Monday.
And Trump is already talking about shifting gears to “phase two” immediately. That would put concerns about tensions flaring up again back on the table.