Breaking News: Phase One Deal Done, Market Remains Cautious

Posted by Fullerton Markets on January 16, 2020 at 4:43 PM

As existing tariffs on Chinese goods remain even after the phase one deal, global trade tensions might not be better off yet. Long gold would be a safer bet.

The US and China finally signed the phase one deal after more than two years of rising tensions. However, the damage inflicted on the economy cannot be undone even with the phase one deal being signed.

Included in the deal is a commitment from Beijing to buy, over two years, at least US$200 billion more of American goods and services than it did in 2017. Those additional purchases will be made up of around US$77 billion in manufacturing, US$52 billion in energy, US$32 billion in agricultural goods and US$38 billion in services (includes tourism, financial and cloud services).

The deal will also result in the suspension of a planned December tariff on about US$162 billion worth of Chinese goods and halve an existing 15% duty on imports worth around US$110 billion.

Ultimate Winners
President Trump: With the trade war behind him temporarily, Trump can now concentrate his efforts on his re-election in November 2020. The relief from the trade war could also boost Trumps ratings.

President Xi: The signing of the deal offered loosening market access to US financial and car firms. In many cases, companies from other countries are already benefiting from the changes. Furthermore, the tariffs implemented so far have already hit China’s economy by 0.25% as US demand fell by a third.

Vietnam, Mexico, Taiwan: Due to the rerouting of supply chains, companies are moving to Vietnam, Mexico, Taiwan and other countries. We’ve seen US companies moving their manufacturing to these countries to avoid tariffs.

Ultimate Losers
American companies: Even though the existing deal halves tariffs on $120 billion worth of goods, the existing $360 billion in Chinese goods and more than $100 billion worth of US goods remain unchanged. The existing companies may already be rerouting its supply chain away from China to avoid the tariffs. Even though it could be an expensive move, it will benefit them in the long run given the uncertainty in the US-China trade deal.

Farmers: As part of the deal, China has to boost purchases in manufacturing, services, agriculture and energy to $200 billion over two years. Due to the long duration of the deal, China has stated that whether they fulfil the deal or not will be dependent on market demand.

Furthermore, farmers who have been targeted by China's tariffs, have seen bankruptcies soar, prompting a $28 billion federal bailout.

The rest of the pressing issues including existing tariffs will be negotiated in phase two of the deal after Trump’s re-election. We do not expect anything concrete anytime soon. With the existing tariffs still in place, the consumers and US companies are not better off yet and only data in the upcoming months will tell.

We would suggest continued caution and sticking to risk-averse sentiments until we can see an improvement in both US and China data.

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