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The U.S.-China trade deal is a step toward trade peace, but there's still a long way to go

A so-called Phase 1 trade deal between the U.S. and China ensures the dispute between the two countries won't escalate — at least for now.

While the agreement addresses some of their outstanding issues — specifically China agreeing to buy more American agricultural products — what's perhaps even more significant are the thorny issues that remain unresolved.

Some analysts warn that any celebrations declaring it a "historic breakthrough"[1] may be premature.

Stock markets have jumped every time such progress has been rumoured — and it's been rumoured off and on for months now.

"It never ceases to amaze me how investors can continue to react to the same piece of news," David Rosenberg, chief economist at Gluskin Sheff wealth management in Toronto, said in a note to clients. 

Many of the details of the partial deal haven't been released, but here's a look at what we know so far.

What is in the deal

The global economy has been held back as the dispute between the U.S. and China has ebbed and flowed since 2018. Any step away from the brink is good for everyone.

Many were worried about the impact of the next round of tariffs, which would have hit American consumers just ahead of Christmas.

The now-cancelled tariffs would have targeted Chinese-made goods including smartphones, clothing and toys.

The U.S.-China deal reduces some tariffs on goods. In exchange, China has agreed to buy more U.S. agricultural products. (Mario Tama/Getty Images)

Sal Guatieri, senior economist at BMO, says the partial deal means those new tariffs are off the table.

But more surprising, he says, the agreement will cut existing tariffs on $360 billion in Chinese imports. It will roll back the tariff rate imposed in September on items ranging from televisions to bed linens.

"The rollbacks, if realized, could revive business sentiment and add a couple of tenths to U.S. GDP growth next year," Guatieri said in a note to clients. "At the very least, the de-escalation in trade tensions, if sustained, would shift the economic risks to the upside."

In return for the elimination of tariffs, China has promised to buy large quantities of U.S. soybeans, poultry and other agricultural products.

A round of now-cancelled tariffs were set to kick in this weekend and would have hit U.S. shoppers right before Christmas. (Katherine Holland/CBC)

U.S. President Donald Trump says the Chinese have agreed to buy $50 billion worth.

"And I say, affectionately, the farmers are going to have to go out and buy much larger tractors, because it means a lot of business, a tremendous amount of business," Trump told reporters.

What's not in the deal

Markets went up Friday on the news of the agreement. But they did the same thing last week and last month[2] when negotiators said a deal was coming.

Rosenberg isn't sure investors fully understand just how limited this agreement is.

The core of the U.S.-China dispute is over what the Americans consider unfair subsidies for Chinese industries and the need for stiffer protections for intellectual property and against currency manipulation.

The Phase 1 deal addresses none of those issues.

In a note to clients, Rosenberg says Phase 1 deals with a "tiny portion of issues," while the much more important ones, such as subsidies and technology transfers, "have been left for another date."

That skepticism didn't keep Trump from hailing the agreement as a "phenomenal deal."

"This is a very large deal," he told reporters at the White House. "The China deal. It covers tremendous manufacturing, farming, a lot of rules, regulations, a lot of things are covered. It's a Phase 1 deal, but a lot of big things are covered."

But even Trump admits some of the biggest blocks of tariffs remain in place.

"The tariffs will largely remain at 25 per cent on $250 billion," he said. "And we'll use them for future negotiations on the Phase 2 deal, because China would like to see the tariffs off."

The upside for global trade tensions

The partial deal is Trump's second trade victory of the week. On Tuesday, Canadian, American and Mexican negotiators finally agreed to a revised deal to replace NAFTA[4].

And in the U.K. election this week, the Conservatives secured a majority government, which should dramatically reduce the chances of a no-deal Brexit[5].

The possibility of Britain leaving the E.U. without a formal divorce agreement has raised serious concerns and uncertainty about how trade might be affected in Europe.

No one knows exactly how the U.K.'s departure from the EU will proceed, but with the election result, at least some of the uncertainty seems to have been removed.

For the first time in a long time, the news about global trade isn't a total disaster. And that has some analysts optimistic heading into 2020.

While she shares many of the concerns about the bigger issues between the U.S. and China that need addressing, Frances Donald, chief economist at Manulife Asset Management in Toronto, says the Phase 1 deal shows that both sides are willing to make a deal and get this dispute behind them.

"Canadians can breathe a sigh of relief," Donald said. "Global growth looks as though it now has upside potential and the worst geopolitical tensions are behind us."

And that, she says, is good news for everyone.

"It not only helps our trade sector and our manufacturing sector, but it will support markets that will translate into better equity returns for Canadians as well."

References

  1. ^ "historic breakthrough" (www.nytimes.com)
  2. ^ month (www.cbc.ca)
  3. ^ @realDonaldTrump (twitter.com)
  4. ^ deal to replace NAFTA (www.cbc.ca)
  5. ^ no-deal Brexit (www.cbc.ca)

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