China and the US have agreed to a “phase one” trade deal, bringing a ceasefire at least in the trade war which has run since 2018. Our own forecasts assumed a deal would be reached, but the details so far would suggest an agreement which exceeds our expectations.
Why the phase one deal appears to slightly exceed our expectations
We had assumed a suspension of further tariff increases and a commitment from China to purchase $20 billion in American agricultural goods, as well as improving intellectual property protections. According to the US, as well as commitments on intellectual property and technology transfer, China has agreed to buy $50 billion of agricultural goods. That said, Chinese officials speaking today demurred on providing a figure and said only that the US would release those details.
From the US, in addition to cancelling December’s planned tariffs, a commitment has been made to cut existing tariffs; though again China would not be drawn on the size of tariff reduction, directing reporters to the US officials instead. President Trump has indicated that the 15% tariffs applied in September of this year will be halved.
The reticence of Chinese officials to confirm details might suggest things are not fully nailed down, and talks have broken down at advanced stages before. Indeed, the officials mentioned the need for ‘legal review’ and we would not rule out a breakdown happening again. However, assuming the details so far prove to be correct, this would suggest upside risk to our current economic forecasts. However, with only a modest reduction in tariffs, the additional growth benefits would also be correspondingly marginal.
What comes next in US-China trade relations?
President Trump has tweeted that “phase two” negotiations will begin immediately, indicating a certain eagerness to wrap up the trade war. However, China has previously stated that it has no interest in a “phase two” deal, given the issues on the table.
Changes to industrial policy in particular seem a red line for China, which regards the request as meddling in Chinese sovereignty. There is also, arguably, little incentive to pursue such talks with a potential change of US president looming in late 2020.