U.S. – China Trade Agreement: A Pause On Trade War?

One of the great threats that have influenced the performance of financial markets especially over the last 2 years seems to have neutralized.

After two years of duties and counter-duties on an ever-increasing number of goods, the agreement between the USA and China puts an end to the escalation of the trade war that affected the two major economies in the world.

us-china-agreement-january-2020

The Agreement

Here are some of the early reactions following the agreement signed in January:

Donald Trump claims that it is “one of the greatest trade deals ever made”. The immediate upside for the U.S. is Beijing’s commitment to buy 200 billion dollars of American goods in two years (not bad, considering that the Chinese trade surplus with the USA in 2019 stands at 353 billions of dollars).

On the other side of the world, Xi Jinping stated that “the agreement is good for China, for the United States and for the world”. The US commitment to China provides for the suspension of further duties on Chinese imports and the cutting of a number of duties already in place.

Overall, it is quite a big deal, considering the amount of goods traded between China and U.S. and what it means for the world economy as a whole.

Imports and Exports Between China and United States

China and United States together literally make up half of the world GDP and currently dominate the world stage for economic power.

The trade relationship between the two countries didn’t happened overnight, it developed across decades and it became the largest economic relationships around the globe.

This chart gives an idea of the types of traded goods and the amount of dollar value:

us-china-international-trade


Source and Credits: howmuch.net

The majority of U.S. exports are highly specialized, manufactured products (such as airplanes, integrated circuits, and semiconductors) but also basic commodities (gold, copper, soya beans).
On the other hand, U.S. are massive importers of smartphone, computers and other electronic devices.

Like it or not, U.S. and China are strictly bound together even if they may have different goals. Over the years their interdependence grew stronger, China saw a tremendous growth and while also relying on U.S. to buy their goods and grow their economy, while U.S. benefitted from cheap manufacturing and technology products.

Today, data shows that the U.S. import from China 4.5 times what it exports:

trade-deficit-us-china
Source and Credits: howmuch.net

What Changes?

Speaking in economic terms, although protectionism can lead to temporary advantages in the very short period for one party, in the end we all lose. So yes, this agreement could be an advantage for the whole world.

For Trump it is certainly a political victory of absolute importance for his election campaign, a victory to be claimed against all the major beneficiaries of the agreement (in particular, workers in manufacturing, energy services and agri-food products).

From China’s point of view, the 200 billion dollars of imports in goods and services seem more of a concession than a demotion following American requests.

Although the news has had a lot of resonance, the overall agreement has a certain reversibility and it is necessary to see what future developments will be.

The recent agreement covers only 2 years. China has made a commitment to purchase goods and services that basically needs anyway, but not to buy them indiscriminately.

Prices must be competitive and supplies must comply with Chinese quality and safety standards. The direct consequence is that if China fails to import enough due to American export restrictions, responsibility will ultimately fall on Washington.

There is still a lot to do. While markets are happy that the deal prevents even bigger escalation of trade tensions, a lot of U.S duties on Chinese exports remain even after the deal.

The real causes that started trade wars (from Section 301, to address “unfair” foreign barriers to U.S.) exports. Main reasons include: China’s abuse of its state-led economic model, alleged currency manipulation for competitive advantage, state-directed cyber-espionage and intellectual properties violation.

The central point of the agreement is the reduction of the U.S. trade deficit and it is a central point for U.S. economy.

In conclusion, we are now during a pause and the phase two of the deal should address issues that involved the two economies. Although we might not see any big progress in the short run, considering the election year, we can say that the game is still open and the second half has yet to be played.


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This article is for informational purposes only, it should not be considered financial advice. You can read the full disclaimer here.

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