Phase One Trade Deal Agreed Between China and U.S.

December 16, 2019
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After weeks of mixed reports from Washington and Beijing, it was announced over the weekend that the U.S. and China have agreed on an interim trade deal, known informally as the Phase One deal.

Although not a comprehensive agreement to address major issues on trade, it takes a step in the right direction and should end tensions in the short term. The deal has already had an impact on the markets, with Asian and European stocks seeing growth today.

U.S. stocks are likely to follow this week with increased confidence in the market.

Tariffs Will be Held Under the New Deal

Trade officials have been extremely positive following the agreement. Robert Lighthizer, the current U.S. Trade Representative, called it a “remarkable achievement” during the weekend.

Under the deal, the U.S. will keep 25% tariffs on $250 billion of Chinese goods but will reduce tariffs on up to $120 billion of goods from 15% to 7.5%.

New tariffs that were due to be introduced on Sunday will not be imposed.

To get the tariff reduction and prevent future tariffs, China promised to increase its purchasing of U.S. agricultural products. It will also cancel future tariffs on U.S. autos.

Some analysts and observers have said that the deal offers too little and that it barely puts the relationship back to how it was when tariffs were first introduced in 2018. There has also been criticism that both sides have decided not to reveal all the details contained in the Phase One agreement. More concessions could be revealed to the media in the coming days.

A Framework for Progress

Major issues remain to be solved. China still needs to provide the U.S. with a guarantee that it will protect intellectual property and make its market more accessible to American businesses. A long term trade deal that addresses all concerns will be harder to achieve.

Lighthizer told the media that “Whether this whole agreement works is going to be determined by who’s making the decisions in China, not in the United States. If the hard-liners are making the decisions, we’re not going to get one outcome. If the reformers are making the decisions, which is what we hope, then we’re going to get another outcome.”

The Phase One deal will at least create a framework for future negotiations and progress. There’s now a precedent that concessions can be made with room to meet in the middle.

While not the landmark deal that the administration promised, this news will undoubtedly bring positivity to the markets as we approach the end of the year.

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