Concerns linger after US and China sign initial trade deal

Chinese Vice Premier Liu He and U.S. President Donald Trump shake hands after signing "phase one" of the U.S.-China trade agreement during a ceremony in the East Room of the White House in Washington, U.S - Reuters 

Beijing/Washington (Reuters): China will boost purchases of US goods and services by $200 billion over two years in exchange for the rolling back of some tariffs under an initial trade deal signed by the world’s two largest economies, defusing an 18-month row that has hit global growth.

Key world stock market indexes climbed to record highs on news of the deal, before stalling on concerns it may fail to ease tensions, with numerous thorny issues unresolved. Oil prices rose, helped by expectations of more Chinese purchases of US oil and gas.

While acknowledging the need for further negotiations with China to solve a host of other problems, President Donald Trump hailed the agreement as a win for the US economy and his administration’s trade policies.

“Together, we are righting the wrongs of the past and delivering a future of economic justice and security for American workers, farmers and families,” Trump said in rambling remarks at the White House alongside US and Chinese officials on Wednesday.

Chinese Vice Premier Liu He read a letter from President Xi Jinping in which the Chinese leader praised the deal as a sign the two countries could resolve their differences with dialogue.

“While markets seemed to take this deal as a risk-on signal, we should all be aware that headlines about trade, particularly US China trade, are going to be a constant feature of 2020,” said Hannah Anderson, Global Markets Strategist, J.P. Morgan Asset Management in Hong Kong.

The centerpiece of the deal is a pledge by China to purchase at least an additional $200 billion worth of US farm products and other goods and services over two years, above a baseline of $186 billion in purchases in 2017, the White House said.

Commitments include $54 billion in additional energy purchases, $78 billion in additional manufacturing purchases, $32 billion more in farm products, and $38 billion in services, according to deal documents released by the White House and China’s Finance Ministry.

Liu said Chinese companies would buy $40 billion in US agricultural products annually over the next two years “based on market conditions” which may dictate timing of purchases in any given year.

Beijing had balked at committing to buy set amounts of US farm goods earlier, and has inked new soybean contracts with Brazil since the trade war started.

Although the deal could be a boost to US farmers, automakers and heavy equipment manufacturers, some analysts question China’s ability to divert imports from other trading partners to the United States.

The deal does not end retaliatory tariffs on American farm exports, makes farmers “increasingly reliant” on Chinese state-controlled purchases, and does not address “big structural changes,” Michelle Erickson-Jones, a wheat farmer and spokeswoman for Farmers for Free Trade, said in a statement.

Trump, who has embraced an “America First” policy aimed at rebalancing global trade in favor of US companies and workers, said China had pledged action to confront the problem of pirated or counterfeited goods and said the deal included strong protection of intellectual property rights.

Washington’s insistence on enforcement mechanisms “with real teeth” could tear the deal apart if any tariffs are re-imposed for non-compliance.

US Speaker of the House of Representative Nancy Pelosi said Trump’s China strategy had “inflicted deep, long-term damage to American agriculture and rattled our economy in exchange for more of the promises that Beijing has been breaking for years,” in a statement.

Earlier, top White House economic adviser Larry Kudlow told Fox News the agreement would add 0.5 percentage point to US gross domestic product growth in both 2020 and 2021.

Aviation industry sources said Boeing Co was expected to win a major order for wide-body jets from China, including its 787 or 777-9 models, or a mixture of both.

The deal touted new wins for US companies looking to access China’s $40 trillion financial sector, but many of the changes were already in the works with Beijing stepping up the pace of opening up in the past year.

China’s central bank said Chinese financial institutions are completely capable of coping with foreign competition and it will strengthen financial supervisions as the sector is freed up.

Tariffs to stay

The Phase 1 deal canceled planned US tariffs on Chinese-made cellphones, toys and laptop computers and halved the tariff rate to 7.5% on about $120 billion worth of other Chinese goods, including flat-panel televisions, Bluetooth headphones and footwear.

But it will leave in place 25% tariffs on a $250-billion array of Chinese industrial goods and components used by US manufacturers, and China’s retaliatory tariffs on over $100 billion in US goods.

Market turmoil and reduced investment tied to the trade war cut global growth in 2019 to its lowest rate since the 2008-2009 financial crisis, the International Monetary Fund said in October.

Trump, who has been touting the Phase 1 deal as a pillar of his 2020 re-election campaign, said he would agree to remove the remaining tariffs once the two sides had negotiated a “Phase 2” agreement.

“We’ve already begun discussions on a Phase 2 deal,” Vice President Mike Pence said in a Fox Business Network interview.