China And U.S. Reach Deal Averting Additional Tariffs
China and the U.S. have reached an initial trade deal that averts billions of dollars of new, inadvisable, tariffs, but the devil is in the details.
Just days before a new round of tariffs was supposed to kick in, the United States and China have agreed to what’s being called a “phase one” trade deal that, at least for now, avoids the imposition of new American tariffs on a wide variety of Chinese goods:
China confirmed Friday it had agreed to a partial trade deal with the United States, but neither government released a text, leaving investors confused about the agreement’s significance.
One day after President Trump approved the so-called “phase one” accord, the only official word from the White House was a presidential tweet that was long on salesmanship and short on details.
“We have agreed to a very large Phase One Deal with China. They have agreed to many structural changes and massive purchases of Agricultural Product, Energy, and Manufactured Goods, plus much more. The 25% Tariffs will remain as is, with 7 1/2% put on much of the remainder …,” the president wrote. “…..The Penalty Tariffs set for December 15th will not be charged because of the fact that we made the deal. We will begin negotiations on the Phase Two Deal immediately, rather than waiting until after the 2020 Election. This is an amazing deal for all. Thank you!
An official statement from the office of the U.S. Trade Representative did little to dispel the confusion, offering no specific figures on the agreed Chinese purchases of U.S. farm goods and other products or what structural changes China would make in its economic system.
Trump has canceled a scheduled tariff increase that would have hit about $160 billion in Chinese goods on Sunday and has agreed to halve the 15 percent tariff on about $120 billion in Chinese products that took effect in September, according to USTR. A 25 percent tariff on an additional $250 billion in imports will remain in place as negotiations begin on a second deal.
Financial markets were unimpressed. The Dow Jones industrial average rose about 130 points before quickly surrendering those gains and dipping into the red just before 11 a.m., after the official statements were released.
“This trade negotiation is turning into a 3-ring circus that looks a lot like a game show or reality TV series only the victims are American investors.
It won’t be a Record Stock Market & Jobs! for long if the Trump administration doesn’t come clean and show markets their cards. So far we’ve got nothing. Absolutely nothing,” Chris Rupkey, chief financial economist at MUFG Union Bank, wrote in a client note early Friday morning.
The text includes nine chapters, including ones on intellectual property rights, technology transfer, food and farm products, financial services, exchange rates, and dispute resolution, Wang Shouwen said at the 11 p.m. news conference at the State Council Information Office in Beijing.
The Chinese and the American delegations will now carry out a legal review and check the translation as soon as possible, Wang told reporters. They will then make the arrangements for the formal signing of the agreement, he said.
Liao Min, vice finance minister, said that China will consider not imposing the tariffs it had threatened to slap on 3,300 American products Sunday, including auto parts and chemicals.
“China will take corresponding measures by not implementing the new tariffs planned for Dec 15,” Liao said. “This is the consensus reached by both sides in the phase one deal.”
The agreement still, however, seemed tenuous.
The Chinese side did not make any mention of the dollar amount for the farm products that Beijing will buy from the United States in return. The Trump administration had previously suggested that China would buy $50 billion in agricultural goods like soybeans and pork.
Bai Ming, an expert linked to China’s commerce ministry, said the U.S. tariff rollback was “a goodwill gesture.”
“It is an improvement but not enough. China will mean what it says, and the U.S. should not go back on its promise,” the nationalist Global Times quoted Bai as saying.
As is usually the case with agreements like this, the devil is in the details, and those details remain entirely unclear as of this moment. The most that can be said is that the increased tariffs on the part of both the United States and China that were set to go into place on Sunday have been canceled. Beyond that, it’s not clear exactly what a “phase one” trade deal is or what it will mean for the state of the trade war or the economies of either the United States or China going forward. Those questions may be answered when the text of the proposed agreement is released either today or over the weekend. As things stand right now, then, the mood surrounding reception of the deal is mostly muted among investors, as reflected by the fact that markets have been mostly flat all die rather than surging as they did yesterday when it was first reported that some kind of deal was on the horizon.
That being said, at the very least the fact that the tariffs that would have gone into effect over the weekend are being canceled is a good thing. Those tariffs would, of course, have hit American businesses significantly just as the previous tariffs have, but they also would have hit consumers particularly heavily given the fact that they would have impacted a wide variety of consumer goods. That is one of the main reasons why they were initially delayed to mid-December after they were announced in August because it was feared that imposing them prior to the holiday shopping season would have increased prices and caused problems for what remains one of the most important times of the year for consumer spending specifically and the economy more generally.
In other words, this is a good first step forward, but it is only one step. Washington and Beijing have stepped away from the brink of a potentially disastrous turn in the trade war. Where it goes from there depends on future negotiations.