U.S.-China Trade Deal Back in the Headlines as Tensions Rise

Back in January, President Donald Trump and Chinese Vice Premier Liu He inked a monumental trade deal after years of a trade tariff tit-for-tat. Fast forward six months, and the trade resolution is rumored to be falling apart.

These rumors, of course, have ignited more concerns about global economic growth in a world still reeling from the coronavirus pandemic. Wall Street has been particularly anxious, as any headline that claims the trade deal is “over” sends stocks spiraling lower.

So, as we enter the second half of 2020, let’s consider the Phase 1 trade deal and why it remains a market-moving event.

Digging into the Details

Ever since President Trump was sworn into office in January 2017, he has looked to even the playing field with China. Specifically, President Trump claimed that China stole U.S. intellectual property, as well as benefited from unfair trading practices with the U.S.[1]

The Phase 1 trade deal was far from a touchdown for the U.S., but it certainly addressed a few of President Trump’s biggest concerns. Here’s the main items included in the initial trade deal:[2]

•      Over the next two years, China will purchase at least $200 billion in American goods and services, including $77.7 billion in manufacturing, $52.4 billion in energy and $37.6 billion in services.

•      China also agreed to an additional $32 billion in purchases of U.S. agricultural products in the next two years.

•      The U.S. will decrease its tariffs on $120 billion worth of Chinese products to 7.5%, down from the previous 15% tariff.

•      In regard to intellectual property, China agreed to fight patent infringement and imitation products with stricter legal protections for copyrights, patents and trademarks.

•      And, in response to allegations that China devalues its currency to create better exchange rates and trade advantages, China committed to limit its efforts to devalue the Chinese yuan.

Again, the Phase 1 trade deal didn’t check all of the boxes on President Trump’s agenda, but it was hailed as a “big win” for the President and the U.S. overall. Wall Street also cheered the landmark trade deal, as it ended years of trade tariff retaliations that hurt corners of the U.S. economy, like agriculture.

Rising Tensions Rekindle Trade War Fears

However, the coronavirus pandemic has once again ignited tensions between the U.S. and China. President Trump has been vocal in placing the blame for the coronavirus pandemic on China. And, as a result, some fear that the Phase 1 trade deal could be tossed in the trash bin.

That’s a viable concern considering that Peter Navarro, the White House trade adviser, was recently quoted as saying that the trade deal was “over.” He quickly recanted this statement, and President Trump also defended the trade deal on Twitter,[3] but the damage was done. Many were left wondering if the trade spat between the U.S. and China will resume and further hurt an already ailing U.S. economy.

Wall Street was already laser-focused on the economic data. Every report about unemployment, housing, consumer spending and manufacturing is deemed either positive or negative—and investors respond accordingly. It made June a fairly volatile month for the stock market.

But, before we react to the headlines like the rest of Wall Street, we need to remember that breaking the Phase 1 trade deal would be detrimental to both the U.S. and Chinese economies. In fact, a Morgan Stanley economist recently stated that the Trump administration needs to be focused on the U.S. economic recovery, and another trade war would only impede this recovery.[4]

Overall, we’ll likely see more headlines about tensions between the U.S. and China, as well as claims that another trade war is imminent. And, as always, these headlines have the potential to move the market.

The reality, though, is that both the U.S. and China are focused on accelerating economic growth in their respective countries in the wake of the pandemic. The Phase 1 trade deal will likely stand, as it will naturally boost economic growth with both countries making purchases from the other.

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[1] https://www.bbc.com/news/business-45899310

[2] https://www.reuters.com/article/us-usa-trade-china-details-factbox/whats-in-the-us-china-phase-1-trade-deal-idUSKBN1ZE2IF

[3] https://www.nytimes.com/2020/06/23/business/economy/trump-navarro-china-trade-deal.html

[4] https://www.cnbc.com/2020/06/05/us-not-likely-to-break-phase-one-trade-deal-with-china-morgan-stanley-says.html