05 Feb U.S. vs. China Trade: Phase One Reaction
The turning points in war are a tricky subject. Often armistices and ceasefires do not necessarily mark the end of a war, but rather a simple pause in hostilities . In our mind the new phase one agreement is an example of this.
In this agreement China agreed to additional purchases of U.S. goods and services including $32 billion in agricultural products and $52 billion in energy goods. However, more importantly they agreed, at least on paper, to curb some business practices that caused friction with U.S. investors. The apparent de-escalation removed a level of uncertainty, allowing investors to focus on the future.
While these steps are important, and both sides can seemingly claim victory, the deal is fragile. Concerns rest in the following components of the agreement:
Tariffs Remain In Place for Both the Chinese and U.S. Consumers
The U.S. will maintain 25% tariffs on about $250 billion worth of Chinese imports of intermediate and durable goods. Additionally the U.S. will levy a reduced rate of 7.5% on another $110 billion. Conversly, China will keep duties on 5% – 25% on about $110 billion in goods
China’s Purchase Commitments Are Conditional
China has declared that its purchases will depend on “considerations” and “market conditions.” These statements leave the Chinese with the opportunity to change their purchasing habits. More importantly, the values they have agreed to purchase seem unreasonable. To fulfill its commitments, China would have to double its purchases from American companies from $188 billion to $386 billion by 2021, an annualized growth rate of 21%. This compares to a 4% growth rate seen from 2013 – 2017.
Reforms Agreed to Were Already In Place
Unbenownist to many several of the concessions the Chinese made were already in place. Specifically, in 2017 they allowed foreign firms increased access to the financial services portion of their economy. Additionally, they have added intellectual property rules and enforcement methods in the recent past.
While we are encouraged that steps have been made, we think it is important investors understand that there is still a great deal to resolve between the two countries.