US-China deal
15 January

US-China deal

After 18 months of hard negotiation, the U.S.-China trade war is set to enter a new, quieter phase as U.S. President Donald Trump and Chinese Vice Premier Liu He sign an initial trade deal that aims to vastly increase Chinese purchases of U.S. manufactured products, agricultural goods, energy and services. The Phase 1 agreement caps a long tariff conflict between the world’s two largest economies that has hit hundreds of billions of dollars in goods, roiling financial markets, uprooting supply chains and slowing global growth. Started as a protest from the United States for the large trade imbalance between the two countries, the key point of the deal is a pledge by China to purchase an additional $200 billion worth of U.S. goods over two years to cut the trade deficit that peaked at $420 billion in 2018. 

Beijing will boost energy purchases by some $50 billion and services by $35 billion, while agricultural purchases will get a $32 billion lift over the two years. When combined with the $24 billion in 2017 farm exports, the $16 billion annual increase approaches Trump’s goal of $40 billion to $50 billion in annual agricultural sales to China. The Phase 1 deal, reached in December, cancelled planned U.S. tariffs on Chinese-made cell phones, toys and laptop computers and halved the tariff rate to 7.5% on about $120 billion worth of other Chinese goods, including flat panel televisions, Bluetooth headphones and footwear. But it will leave in place 25% tariffs on a vast, $250 billion array of Chinese industrial goods and components used by U.S. manufacturers. The deal could be a big boost to farmers and be crucial for struggling plane maker Boeing, U.S. automakers and heavy equipment manufacturers. China will now have to divert some imports from other trading partners to the United States suggesting markets cannot rest just yet as further global trade friction is expected, albeit on a smaller scale.

The so called “Phase One” deal also includes pledges by China to forbid the forced transfer of American technology to Chinese firms as well as to increase protections for U.S. intellectual property, a subject which has also been raised by other big global players like the EU and Japan. There are no provisions to rein in rampant subsidies for Chinese state-owned enterprises – a key dispute between the US and the EU - which the US administration blames for excess capacity in steel and aluminium and says threaten industries from aircraft to semiconductors. China has agreed to open its financial services sector more widely to U.S. firms and to refrain from deliberately pushing down its currency to gain a trade advantage which lead to the US Treasury dropping its “currency manipulator” claim. The deal fails to address digital trade restrictions and China’s onerous cybersecurity regulations that have hobbled U.S. technology firms in China. U.S although there have been leaks suggesting the US is preparing to regulate its market in order to stop firms like Huawei entering its core services. Treasury Secretary Steven Mnuchin said that President Trump could consider easing tariffs if the world’s two largest economies move quickly to seal a Phase 2 follow-up agreement.

Oil prices slipped on concerns that the pending Phase 1 trade deal between the United States and China, the world’s biggest oil users, may not boost demand as the U.S. intends to keep tariffs on Chinese goods until a second phase. Brent was down 76 cents at $64.73 per barrel by while U.S. West Texas Intermediate lost 20 cents at $58.03 a barrel. U.S. crude inventories rose by 1.1 million barrels, data from the American Petroleum Institute showed, countering expectations for a draw. U.S. oil production is expected to rise to a record of 13.30 million barrels per day in 2020. Key members of OPEC+ have meanwhile started discussions on possibly delaying until June a decision on extending an existing output cut.


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