Phase One Of US-China Deal To Help In De-escalation Of Trade War

The ‘Phase 1’ trade deal signed between the United States and China on January 15 may not completely end the trade conflict between the two nations, but it will help the situation from significantly worsening, according to a report by trade credit insurer and Allianz subsidiary Euler Hermes.

As part of the deal, the US will halve its 15% tariff on around US$120 billion of Chinese goods as well as cancel the implementation of several duties that were supposed to come into effect in December 2019. China is expected to increase its imports from the US by around US$200 billion over the next two years, and it also agreed to enforce better protections for intellectual properties (IP).

According to the report, the deal provides short-term relief by dissipating uncertainty and causing the average US tariff to drop by one percentage point to 8%. However, the agreed enforcement mechanism leaves room for policy volatility and does not entail any further tariff reduction this year.

Furthermore, Euler Hermes believes that a ‘Phase 2’ deal won’t happen within 2020, due to remaining issues being much more controversial.

The volatility of US trade policy could impact Europe in several ways, the report said. The digital tax, the European car sector, potential retaliation against Boeing subsidies, and climate policy could become irritants, which could trigger limited US retaliation.

As the underlying tensions between the economic giants remain unsolved, Euler Hermes believes that equity investors will continue to be temperamental on trade news. Trade policy volatility could trigger mini episodes of flight to safety, but monetary policy will continue to be the main driver of global yields. The report predicted that the yield will roam below its fundamental fair value estimate (1.9%) before the 2020 elections.

“While stepping up agricultural imports could be within China’s reach and would be the priority, increasing energy and manufacturing imports could be more challenging,” the report said. “American farmers should benefit from additional Chinese purchases. Yet Brazilian, EU and Australian agrifood exports could be at risk of being substituted by imports from the US. Similarly for energy, where Russian and Saudi Arabian exports are at risk of being substituted, and manufacturing, where Japanese and EU exports are at risk. At a global level, although 2020 will see a modest improvement from 2019, trade growth will remain subdued.”