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US-China trade deal: Initial pact may reduce tensions but doubts remain

Beijing and Washington touted the "Phase 1" agreement as a step forward after months of stop-start talks, and investors greeted the news with relief

Reuters 

US-CHINA, china
Two knights face to face on Chinese yuan and US dollar background. Photo: Shutterstock

China will boost spending on US products in exchange for the rolling back of some tariffs under an initial trade deal signed by the world's two largest economies on Wednesday, defusing an 18-month row but leaving numerous thorny issues unresolved.

Beijing and Washington touted the "Phase 1" agreement as a step forward after months of stop-start talks, and investors greeted the news with relief. Even so, there was scepticism the US-China trade relationship was now firmly on the mend.

The deal fails to address structural economic issues that led to the trade conflict, does not fully eliminate the tariffs that have slowed the global economy, and sets hard-to-achieve purchase targets, analysts and industry leaders said.

While acknowledging the need for further negotiations with China to solve a host of other problems, President hailed the agreement as a win for the US 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.

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

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.

Soybean futures sank after Liu's remarks, a sign that farmers and traders were dubious about the purchase goals.

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.

Key world stock market indexes climbed to record highs before stalling on hopes the deal would reduce tensions, while oil prices slid on doubts the pact will spur world economic growth and crude demand.

"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.

"Highly sensitive issues like the US's export ban to several Chinese companies, increased scrutiny on Chinese investments abroad, and China's application of its commitment to treat foreign and domestic business alike within China are likely to make headlines throughout the year," she said.

Trump and his economic advisers had pledged to attack Beijing's long-standing practice of propping up state-owned companies and flooding markets with low-priced goods as the trade war heated up.

Although the deal could be a boost to US farmers, automakers and heavy equipment manufacturers, some analysts question https://af.reuters.com/article/commoditiesNews/idAFL4N29J26S China's ability to divert imports from other trading partners to the United States.

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.

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 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.

CCTV, China's state-run television outlet, said the deal would satisfy China's increasingly demanding consumers by supplying products like dairy, poultry, beef, pork, and processed meat from the United States.

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 Monetary Fund said in October.

Tariffs on Chinese imports have cost US companies $46 billion. Evidence is mounting that tariffs have raised input costs for US manufacturers, eroding their competitiveness.

Diesel engine maker Cummins Inc said on Tuesday the deal will leave it paying $150 million in tariffs for engines and castings that it produces in China. It urged the parties to take steps to eliminate all the tariffs.

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.

First Published: Thu, January 16 2020. 09:19 IST
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