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.
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