U.S.-China phase one trade deal: it’s all about the detail

On January 15, 2020, Washington and Beijing signed the long-awaited phase one U.S.-China trade deal.¹ The agreement, which addresses issues ranging from Chinese imports of U.S. goods to currency exchange rates, had been widely expected. Sue Trinh, our senior macro strategist, who has been following developments closely, notes that the real test will come when the agreement moves to the implementation phase and, crucially, when both sides begin to set the agenda for the next phase of talks.

The signing of the phase one U.S.-China trade deal came as no surprise to investors. Although the deal contains important agreements pertaining to market access, intellectual property rights, and currencies, many of these had already been announced or implemented before January 15. Overall, we believe that China will continue to deliver on commitments that overlap with its own interest, which ultimately raises the stakes when it comes to implementing the deal in areas that don’t align with the country’s goals. As always, the devil is in the detail.

Looking at the substance of the agreement, China has agreed to increase purchases and imports of U.S. goods and services by at least US$200 billion in 2020 and 2021. These include agricultural, manufacturing, and energy products.2 In our view, the agreement on purchase levels may be unrealistic, but it’s one that China could meet if the government diverts its current import demand away from other trade partners to the United States.

Such a move would mean that China’s total imports would remain unchanged and therefore wouldn’t translate into a boost for global growth. We also note that a larger share of the proposed purchases has been slated for 2021 instead of 2020. This schedule affords China some flexibility should the United States find itself under a new administration after the upcoming presidential election in November. The agreement also includes several mitigating clauses that allow China to adjust its purchases, for example, slower domestic growth. Furthermore, the United States has committed to ensure these goods are available for export into China, which could become an issue with existing export restrictions.

On the currency front, the agreement, in our view, contains almost nothing new. China has agreed to provide data that it already discloses (e.g., foreign currency reserves or balance-of-payment data). The other provisions are mostly a reiteration of existing Chinese commitments to the International Monetary Fund and the G20.

Finally, the agreement may be most notable for the issues that it doesn’t address: None of the issues that lie at the core of the U.S.-China economic dispute—tariffs, technology transfer, and Chinese government subsidies—are mentioned in the text. U.S. President Donald Trump has stated that a phase two deal and tariff rollback are unlikely to be finalized until after the presidential elections in November.3 However, as the phase one deal gives the United States the unilateral right to punish China if it fails to deliver on its pledges, tensions could escalate at any time.

From a market perspective, the Chinese renminbi has been the principal beneficiary of investor optimism in the lead up to the deal. Since the contours of the agreement were announced in mid-December last year, the renminbi (both onshore and offshore) has been one of the best-performing emerging-market currencies.4

Having said that, we believe that weaker Chinese economic growth and increased nontrade barriers could lead to another bout of renminbi depreciation. Meanwhile, a breakdown in phase two talks will likely accelerate that trend.

 

 

1 Economic and Trade Agreement between the United States of America and the People’s Republic of China, Phase One, January15, 2020, Office of the United States Trade Representative. 2 The benchmark for purchase amounts will be 2017. In 2017, China bought US$130 billion in goods and US$56 billion in services, Wall Street Journal, January 15, 2020. 3 “Trump says he may wait to finish Phase 2 China trade deal until after November,“ Reuters, January 10, 2020. 4 Bloomberg, as of January 16, 2020.

Investing involves risks, including the potential loss of principal. Financial markets are volatile and can fluctuate significantly in response to company, industry, political, regulatory, market, or economic developments. These risks are magnified for investments made in emerging markets. Currency risk is the risk that fluctuations in exchange rates may adversely affect the value of a portfolio’s investments.

The information provided does not take into account the suitability, investment objectives, financial situation, or particular needs of any specific person. You should consider the suitability of any type of investment for your circumstances and, if necessary, seek professional advice.

This material, intended for the exclusive use by the recipients who are allowed to receive this document under the applicable laws and regulations of the relevant jurisdictions, was produced by, and the opinions expressed are those of, Manulife Investment Management as of the date of this publication, and are subject to change based on market and other conditions. The information and/or analysis contained in this material has been compiled or arrived at from sources believed to be reliable, but Manulife Investment Management does not make any representation as to their accuracy, correctness, usefulness, or completeness and does not accept liability for any loss arising from the use of the information and/or analysis contained. The information in this material may contain projections or other forward-looking statements regarding future events, targets, management discipline, or other expectations, and is only as current as of the date indicated. The information in this document, including statements concerning financial market trends, are based on current market conditions, which will fluctuate and may be superseded by subsequent market events or for other reasons. Manulife Investment Management disclaims any responsibility to update such information.

Neither Manulife Investment Management or its affiliates, nor any of their directors, officers, or employees, shall assume any liability or responsibility for any direct or indirect loss or damage or any other consequence of any person acting or not acting in reliance on the information contained herein. All overviews and commentary are intended to be general in nature and for current interest. While helpful, these overviews are no substitute for professional tax, investment or legal advice. Clients should seek professional advice for their particular situation. Neither Manulife, Manulife Investment Management, nor any of their affiliates or representatives is providing tax, investment, or legal advice. Past performance does not guarantee future results.

This material was prepared solely for informational purposes, does not constitute a recommendation, professional advice, an offer, or an invitation by or on behalf of Manulife Investment Management to any person to buy or sell any security or adopt any investment strategy, and is no indication of trading intent in any fund or account managed by Manulife Investment Management. No investment strategy or risk management technique can guarantee returns or eliminate risk in any market environment. Diversification or asset allocation does not guarantee a profit nor protect against loss in any market. Unless otherwise specified, all data is sourced from Manulife Investment Management.

Manulife Investment Management

Manulife Investment Management is the global wealth and asset management segment of Manulife Financial Corporation. We draw on more than 150 years of financial stewardship to partner with clients across our institutional, retail, and retirement businesses globally. Our specialist approach to money management includes the highly differentiated strategies of our fixed-income, specialized equity, multi-asset solutions, and private markets teams—along with access to specialized, unaffiliated asset managers from around the world through our multimanager model.

These materials have not been reviewed by, are not registered with any securities or other regulatory authority, and may, where appropriate, be distributed by the following Manulife entities in their respective jurisdictions. Additional information about Manulife Investment Management may be found at manulifeam.com.

Australia: Hancock Natural Resource Group Australasia Pty Limited, Manulife Investment Management (Hong Kong) Limited. Brazil: Hancock Asset Management Brasil Ltda. Canada: Manulife Investment Management Limited, Manulife Investment Management Distributors Inc., Manulife Investment Management (North America) Limited, Manulife Investment Management Private Markets (Canada) Corp. China: Manulife Overseas Investment Fund Management (Shanghai) Limited Company. European Economic Area and United Kingdom: Manulife Investment Management (Europe) Ltd., which is authorized and regulated by the Financial Conduct Authority, and Manulife Investment Management (Ireland) Ltd., which is authorized and regulated by the Central Bank of Ireland. Hong Kong: Manulife Investment Management (Hong Kong) Limited. Indonesia: PT Manulife Aset Manajemen Indonesia. Japan: Manulife Asset Management (Japan) Limited. Malaysia: Manulife Investment Management (M) Berhad (formerly known as Manulife Asset Management Services Berhad) 200801033087 (834424-U) Philippines: Manulife Asset Management and Trust Corporation. Singapore: Manulife Investment Management (Singapore) Pte. Ltd. (company registration no. 200709952G) Switzerland: Manulife IM (Switzerland) LLC. Taiwan: Manulife Investment Management (Taiwan) Co. Ltd. Thailand: Manulife Asset Management (Thailand) Company Limited. United States: John Hancock Investment Management LLC, Manulife Investment Management (US) LLC, Hancock Capital Investment Management, LLC, and Hancock Natural Resource Group, Inc. Vietnam: Manulife Investment Fund Management (Vietnam) Company Limited.

Manulife Investment Management, the Stylized M Design, and Manulife Investment Management & Stylized M Design are trademarks of The Manufacturers Life Insurance Company and are used by it, and by its affiliates, under license.

Sue Trinh

Sue Trinh, 

Senior Macro Strategist

Manulife Investment Management

Read bio