03 January 2020

 

Full Report

Predictions

  • Interim trade deal with US will provide temporary relief for businesses, but further tariff increases and trade restrictions remain likely in coming year
  • China’s focus on increasing purchases from US will likely have negative impact on countries such as Japan, which will likely see their own sales to China fall
  • Bilateral issues such as technology competition or geopolitical disagreements will continue to act as potential triggers for re-escalation of trade dispute

 

Analysis

President Trump said on 31 December that he would sign a “phase one” trade deal with China at the White House on 15 January. Both sides agreed to the deal on 13 December, and while the full details have not been released, it has already led to a series of tariff reductions. The US cancelled plans to introduce tariffs on USD 160 billion of Chinese goods on 15 December, and also agreed to halve tariffs on another USD 120 billion of goods from 15% to 7.5%. In exchange, China reduced tariffs on over 850 US products from 1 January, and the Finance Ministry said it would lower more tariffs from 1 July. China also said on 23 December that it would open access to its oil, telecom and power markets, and the US said China would increase purchases of US products by more than USD 200 billion over the next two years in the manufacturing, energy, agriculture and services sectors, though Beijing has not confirmed this.

The deal’s fundamentals were agreed in October, with both sides planning to sign it at an international summit in Chile in November (see our 17 October Report). However, when Chile cancelled the event due to domestic unrest the signing was postponed and negotiators returned to their discussions. If the deal is signed on 15 January, this will therefore be the first written agreement since the China-US trade dispute started in 2018. However, it does not signal an end to the dispute, as Washington still places 25% tariffs on around half of its Chinese imports, and Trump said on 31 December that he intends to hold “phase two” discussions with China, though no timeline for these was released. These discussions will likely focus on larger, structural disagreements, in particular China’s subsidisation of domestic industries and other market practices deemed anti-competitive by the US, the EU and other countries.

Source: US Bureau of Economic Analysis

In addition to tariff reductions, the US has said the deal will also include measures to improve intellectual property protection, prevent forced technology transfer, and open Chinese markets further to foreign firms, including in the financial services sector. The agreement will therefore boost the Chinese economy and aid businesses: the IMF predicted on 16 December that it would raise China’s growth to around 6% in 2020, up from its previous October projection of 5.8%. However, most of these commitments are in line with policies China has already announced, in particular as part of the Foreign Investment Law which was passed last March and came into effect from 1 January, and which has several defects and will likely be selectively applied (see our 28 February Report). Separately, the long-term success of the trade deal and related negotiations will depend heavily on whether Beijing meets its agreed commitments.

The fact that the deal focuses on increasing China’s purchases from the US, rather than any substantial reforms, will likely negatively impact countries such as Japan, which could see their own sales fall as China increases the proportion of goods it buys from the US. The lack of major concessions by either the US or China also reflects that the broader bilateral relationship remains tense, and it is therefore likely that further tariff increases or trade restrictions will be introduced after a few months. In particular, technology competition, industrial espionage or geopolitical disagreements over the South China Sea, Hong Kong or Taiwan will be potential triggers for re-escalation. In addition, the fact that China will find it very difficult to raise its imports from the US by as much as USD 200 billion within the next year or so will give the US an excuse to reverse its conciliation measures and enact further penalties, particularly if Trump sees this as politically expedient ahead of the US presidential election in November.

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