The Phase-One US-China Trade Agreement: Cease-Fire, Not Peace Treaty

by Eric Winograd of AllianceBernstein, 1/17/20

The US and China formally signed a phase-one trade deal Wednesday after several months of negotiations. We see the deal as a near-term positive for markets—but it also leaves the thorniest issues between the two countries unresolved.

Calm…With Room for More Tension

The deal signals a cooldown period in the ongoing spat, but it also leaves many possible avenues open for strains to resurface down the road. And many of the previously imposed tariffs remain in place even after the phase-one agreement. The bottom line: US-China trade is less free today than it was a few years ago, and the phase-one deal doesn’t change that reality.

Financial markets aren’t fretting over the details of the deal. They’ve been more focused on the risk of further escalation than the macroeconomic impact of the measures already put into place. So, even though this agreement doesn’t touch most tariffs, the market’s confidence that new tariffs are unlikely means something. Of course, equity markets have leapt up by more than 10% since the deal was in the homestretch, so the good news is likely already priced in.

An Economic Boost to the US, Though Not a Game Changer

The most significant part of the deal in the near term is China’s intention to buy $200 billion more in US goods over the next two years.

If we assume that those purchases go through, the deal would likely boost US gross domestic product by roughly a quarter percentage point from today’s. That helps, but it’s not a game changer, and it probably falls short of offsetting the existing trade war damage. The $200 billion figure deserves a little skepticism: there’s a good chance US exports to China rise but exports to other countries fall, limiting the boost to the US economy.

Of course, the cease-fire could be enough to improve US business confidence and spur corporate America to invest more in domestic production as they anticipate a ramp-up in exports to China, which would make this deal much more meaningful. We’ll be keeping a close eye on indicators of business sentiment, because a rebound in capex would be very good news indeed for the US economy.