Don't pop the champagne cork just yet
When it comes to U.S.-China trade deals, the devil’s in the details. To wit: just as the two countries appeared to be on the verge of ending their dispute last spring, President Trump escalated the trade war instead, launching a wave of new tariffs after accusing China of backtracking on key aspects of a major draft trade pact.
With that as a backdrop, we offer three points worth considering based on the information we’ve gathered about the yet-unsigned “Phase 1” trade agreement announced amid much fanfare last Friday.
- It calls for China to buy $40-50 billion in agricultural products in exchange for the U.S. lifting this week’s scheduled tariff increases on $250 billion of Chinese imports. There could be a big capacity problem, however. The amount of ag exports China would buy is roughly double the record $20 billion it bought from the U.S. in 2017. Moreover, there is a limit to the two commodities China likely wants the most, pork and soybeans, as American farmers annually produce about $23 billion of pork and $40 billion of soybeans.
- There were only vague commitments toward two of the most critical U.S. concerns, China’s alleged theft of intellectual property and currency manipulation. There was no mention of an enforcement mechanism to assure compliance, complaints over state subsidies and industrial policy were set aside, and sanctions against Huawei weren’t addressed. In other words, hard but meaningful issues were left unresolved.
- The agreement does not address the 15% tariffs on an additional $160 billion of Chinese imports slated to kick in in mid-December, which may explain why China has seemingly hedged about whether the potential agreement will be signed. This appears to be nothing more than a negotiating tactic aimed at having the December tariffs cancelled or delayed.
Where to from here?
From all indications, President Trump and China President Xi Jinping are supposed to talk at the Nov. 16-17 Asia-Pacific Economic Cooperation (APEC) meeting in Santiago, Chile, and there’s hope a deal may be signed by year’s end. Such an agreement, if it does come to pass, could work for all sides.
For China, a mini trade deal could help reinvigorate its economy, which has decelerated sharply in large part because of diminished trade. Its global exports fell 3% year-over-year (y/y) in September as increases to Asian countries were not enough to offset a 22% y/y plunge in exports to the U.S. A strengthening China economy would be good for the rest of the global economy, as well.
For Trump, it would allow him to run for re-election in 2020 on the promise of finishing a trade war that he can say he’s winning (we think this is what Trump was planning on all along). And for the U.S., an agreement could help re-accelerate growth, creating an environment we believe would favor value over growth stocks, small caps over large-cap stocks and developed international over domestic stocks. If Brexit is resolved, as it appears may be nearing, our favorable international view would only strengthen.
But again, we must caution. While it’s great the two countries appear to be on better terms, let’s get an actual deal first before we celebrate.