Meaningfully easing the trade war: Phase One has been signed

China Vice Premier Liu He and US President Donald Trump inked the, partial, and long-awaited, Phase One trade deal between the US and China at the White House on Wednesday, de-escalating meaningfully a nearly two-year-long trade war between the world’s two biggest economies.

This de-escalation matters as de-globalization, protectionism and unilateralism have long cast a pall over the global economy. As long as the US and China are at loggerheads, business confidence will be undermined, postponing investment decisions, strangling global trade and harming global growth.

The trade commitments by China look awfully difficult to reach, though, whilst the more difficult issues have yet to be addressed. The crux of Phase One deal commits China to purchasing an additional USD200bn in goods and services from the US by the end of 2021, including:

• USD 77.7 billion of manufactured goods – steam turbines, nuclear reactors, refrigerators, hair clippers, electrical lightning, radar parts, insulated wires, human blood for therapies, antibiotics, iron & steel products;
• USD 52.4 billion worth of energy – liquified natural gas, petroleum oils, methanol, liquified profane, uncalcined petrol, calcined petrol;
• USD 32 billion of agricultural goods – soybeans, bovine & swine meat, wheat, fruits, jams & jellies, corn, flour, cotton, horses and honey;
• USD 37.9 billion worth of services – education-related travel, financial services, reinsurance, insurance, management consulting, telecom services, data hosting, cloud computing services, charges for IP use.

This is a hefty commitment. Last year, China’s purchases from the US contracted by 21% y/y, falling from USD155bn in 2017 and 2018, to USD 122bn. In contrast, China’s imports from the rest of the world fell by a far more muted 1.7% y/y in 2019 and increased by 17% in 2018. Therefore, the agreement commits China to increase imports from the US by over 90% y/y in 2020 and then again by near 50% y/y in 2021.

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