A trade deal with November elections in mind
The eagerly awaited ‘phase one’ trade deal between the US and China mostly cements the status quo on trade. Some existing tariffs on imports from China will be reduced—but most tariffs will stay, including the 25% that the US currently imposes on about USD250 bn of Chinese imports. In a separate move, China was removed from the US Department of the Treasury’s ‘currency manipulator’ list.
The phase one deal largely revolves around China’s promise to import more from the US to reduce the bilateral trade balance. China is committed to importing more US goods over the next two years, in particular manufacturing, agricultural products, and services– totalling 200 billion versus a 2017 baseline.
Crucially, however, the deal leaves aside some important issues, including the treatment of US firms’ intellectual property in China, the question of market access and public subsidies to Chinese firms – and the question of Chinese tech firms’ access to US markets and US suppliers. This said, we do not see the deal falling apart before the November elections as the more business-minded sections of president Trump’s entourage seem to have persuaded him that some steadying of the ship is the best option, electorally speaking, in the near term.
We think the deal could be respected until after the elections, but we see it at risk of falling apart thereafter. In particular, China’s commitment to buy sizable new amounts of US products looks very ambitious and could be a major point of fragility in the deal.
Our scepticism also stems from the decision to leave more complicated questions, including those linked to sensitive intellectual property topics, to a putative ‘phase two’ deal. At this stage, a phase two trade deal looks elusive, with Trump suggesting a further trade deal with the Chinese will not be looked at before the November elections.
In our view, the phase one deal is a clear positive for the Chinese economy in the near term, most directly for exports. However, the indirect impact of the trade war, such as that on corporate investment and supply chains most likely will continue to weigh on Chinese growth. The relocation of supply chains outside China, a trend that started a few years ago but has accelerated since the US-China trade tensions intensified, will likely continue in the medium term.
While we are adjusting our three- and six-month forecasts for the USD/CNY rate, we are leaving our 12-month forecast unchanged at CNY 7.10 as the phase one deal looks fragile and economic momentum in China mixed.