China, U.S. Agree to Phase-One Trade Agreement

After almost two years of uncertainty, continued negotiations and tariff increases on both sides, China and the United States agreed to a limited trade agreement on Dec. 13. This agreement, which is considered to be phase one of the deal, includes some tariff relief, increased agricultural purchases and structural change to intellectual property and technology issues.

With this deal in place, new tariff rates on Chinese goods, including consumer goods such as toys, phones and clothing, that were supposed to go into effect on Dec. 15 were canceled and existing tariff rates on Chinese goods will be rolled back, though no details were provided on when exactly it would occur. In tweets following the announcement of the trade deal, President Trump stated the White House would leave 25 percent tariffs on $250 billion in imports in place while existing duties will be cut on another $120 billion in products to 7.5 percent.

As reported by the Wall Street Journal on Dec. 12, advisor to the president Michael Pillsbury stated he spoke with Mr. Trump, who stated the deal calls for China to buy $50 billion worth of agricultural goods in 2020, along with energy and other goods. In exchange, the U.S. would reduce the tariff rate on many Chinese imports, which now ranges from 15 to 25 percent. In the event Beijing fails to make the purchases it has agreed to, original tariff rates would be reimposed. On Dec. 13 however, U.S. Trade Representative Robert Lighthizer said China may buy $40 billion in agricultural products.

If everything falls into place with the dollar amounts that have been reported and China follows through on purchasing, the trade pact will help revive U.S. agricultural exports to China. Over the past year and a half, agricultural export sales have fallen with China halting farm purchases. According to Commerce Department data, as reported by the Wall Street Journal, U.S. farm exports fell from as much as $25 billion in recent years to below $7 billion in the 12 months through May. Farm exports to China have begun to go up in recent months however still remain nearly 60 percent lower than their pre-trade war peak.

In addition to agricultural changes, both sides have stated they will make changes related to intellectual property, technology transfers and financial services. When the announcement was made regarding the deal, details were unclear on what was agreed upon regarding the changes. “While both sides mentioned this topic, we know no more today than yesterday. From our perspective, this remains largely undone business,” Evercore policy strategists wrote in a note. Fundstrat Washington Policy Strategist Tom Block stated the biggest win for this deal was there is no further escalation. “Is this a positive? Absolutely, yes. Is this going to be written in stone? No, because the President views unpredictability and surprise as the cornerstone of his negotiating skills. The market has to be skeptical and watch what happens with his step,” Block said. He went on to state that besides Trump’s volatile nature, China and the U.S. could see friction on other issues such as human rights.

Before the deal is finalized, the agreement needs to go through the proper legal procedures including an official signing. Lighthizer stated on Dec. 13 that the U.S. and China are aiming to sign the agreement in January in Washington. He further stated U.S. trade to China would increase by $200 billion over two years and the trade deficit will go down as a result of the deal.

President Trump also stated on Dec. 13 that the U.S. will begin negotiations on the next phase “immediately, rather than waiting until after the 2020 election.” Speaking to reporters he stated he would use existing tariffs as a negotiating tool in future discussions adding that China will start buying $50 billion in U.S. agriculture goods “pretty soon.”