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Phase 1 Deal Finally Signed – What Now?

20 January 2020PoliticsEconomicsUSAsia PacEmerging Markets

The US-China Phase 1 deal represents a milestone as it grants a de-escalation of trade tensions, and reaches some commitments on intellectual property and technology issues. It should provide some reprieve to the global economy as some uncertainty is lifted.

Highlights of the agreement include:

  • IP & technology: China to address concerns and unfair practices identified in the Section 301 investigation, strengthening IP protection and ending forced technology transfer.
  • Shopping list: China to increase imports of US goods and services by $200bn over the next two years, with $78bn in manufactured goods, $52bn in energy, $32bn in agriculture and $38bn in services. Chinese purchases of US goods are not enshrined in hard targets. Purchases will be based on market conditions and could rise “if the demand” is there.
  • Financial opening: China to address trade and investment barriers (e.g. foreign equity limitations and discriminatory regulatory requirements) for US financial services providers to compete in China.
  • Currency pact: The US and China are to maintain “high-standard commitments to refrain from competitive devaluations and targeting of exchange rates”, while promoting transparency and accountability. The US removed China’s currency manipulator label on Jan 13.
  • Dispute resolution: The deal creates regular bilateral consultations, but it also “allows each party to take proportionate responsive actions that it deems appropriate”.
  • Tariff rollback: Not mentioned in the deal but announced earlier, the US will maintain the 25% tariffs on $250bn of Chinese goods but reduce the 15% on $120bn to 7.5%. China will also halt its retaliatory tariffs on US goods, especially now to fulfill the import pledge.

    Phase 1 Deal Finally Signed – What Now?
    Past performance does not guarantee future results, real results may fluctuate.

Tensions could still linger but Citi expects no additional tariffs

  • Other issues like China's state subsidies and further reforms are not yet addressed and may continue to pose uncertainties. Trump noted that further tariff cuts would depend on reaching a “Phase Two” agreement, though he gave no timeline for when those talks will begin.
  • Citi’s view: Despite uncertainties, Citi analysts’ more constructive view on economic growth and assumption of no additional tariffs remains the case. Expectations for a comprehensive phase two deal remain low at this point, particularly with November's US elections looming. Looking ahead, markets are likely to be focused on signs of a global demand rebound and earnings follow-through in 2020 to drive share prices higher from here.

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