US/China trade war: A mini-deal, but phase two more difficult

As the US and China reached a ‘phase 1’ deal, Divyang Shah, Macro Rates Strategist, Refinitiv explains the US/China trade war mini deal and why the economic clouds remain dark.

What is clear when it comes to the US/China trade war is that an all-encompassing/significant trade deal of the kind that was mooted before being torn up in May is unlikely (never?) going to happen.  Instead the best that could have been hoped for is a mini-deal that helps both sides claim a victory and delivers a truce to the US/China trade war.

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Details

These hopes were realized on Friday (Oct 11) as US/China reached a limited trade deal that is being described by President Trump as phase one.  The mini-deal suspends US tariff increases to 30% (from 25%) on $250bn of Chinese imports that would have come into effect on October 15th in exchange for China buying some $40-$50bn of agricultural goods.  There are no big concessions from both sides and none should be expected as the objective is to try and secure a truce.

US/China trade war truce details

For the US and China, the economic clouds remain dark, and thus a truce in the trade war would be helpful.  President Trump faces the added headache of impeachment risks, a Fed unwilling to play ball, and an equity market that has stalled.  What we have not seen is a rollback of existing tariffs including those enacted last month consisting of 15% tariffs on $110bn of goods or taken the threat of 15% tariffs on new set of goods on December 15.

The mini-deal is tentative and is expected to be finalized in the sidelines of the APEC summit in Chile on November 16-17, and there could be further talks to cross the T’s and dots the I’s.  But it now raises the stakes for negotiations in phase-two, where much more difficult aspects need arrangement.  The breakdown of talks back in May highlighted how there are limits to what China is politically willing to sign up to, and the risk is as always that escalation is just around the corner from a ceasefire.

US/China trade war and December 15th deadline

One of the unusual aspects to the US/China mini-trade deal (tentative) was that while another set of tariff hikes for Oct 15 were suspended there was no rollback on past tariffs.  There was also no abandonment of plans for the next phase of tariffs of 15% on a new set of goods to come into effect on December 15.  In effect where we have with the mini-deal is an agreement to freeze the trade war until mid-December, which is not really good news even it is designed to maintain pressure on China during phase two of negotiations.”



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Jacob Wolinsky
Jacob Wolinsky is the founder of ValueWalk.com, a popular value investing and hedge fund focused investment website. Prior to ValueWalk, Jacob was VP of Business Development at SumZero. Prior to SumZero, Jacob worked as an equity analyst first at a micro-cap focused private equity firm, followed by a stint at a smid cap focused research shop. Jacob lives with his wife and four kids in Passaic NJ. - Email: jacob(at)valuewalk.com - Twitter username: JacobWolinsky - Full Disclosure: I do not purchase any equities anymore to avoid even the appearance of a conflict of interest and because at times I may receive grey areas of insider information. I have a few existing holdings from years ago, but I have sold off most of the equities and now only purchase mutual funds and some ETFs. I also own a few grams of Gold and Silver