ANALYSIS: US-China Phase One Signing: 16:30GMT/11:30EST

Tariff Reports:

• Reports during Tuesday’s US session state that, according to people familiar with the matter, tariffs on China will remain in-place until after the November US elections; subsequently, USTR Lighthizer and Treasury Secretary Mnuchin confirmed there is no scheduled tariff relief for China going forward. Such reports sparked a mild risk-off reaction, as desks highlight investors had been anticipating additional tariff relief post the Phase One signing; therefore, these reports and confirmation via Officials taints the signing somewhat.


• However, desks highlight the real possibility of President Trump at least indicating the potential for further tariff rollback prior to the November elections at today’s signing; as well as the smaller likelihood of him pre-announcing further rollbacks, but as this would directly contradict Lighthizer and Mnuchin this is unlikely to occur.


• Note, at the end of 2019 a limited deal was agreed to which saw the US cut existing tariffs on China in half, on circa. USD 360bln of goods, alongside the cancellation of the December 15th tariffs on USD 156bln of goods. As things stand the Phase One signing will leave tariffs at the 7.5% and 25% on approximately USD 125bln and USD 250bln of goods respectively.


• Additionally, the aforementioned source reports on tariffs remaining in place note that the understanding is that no earlier than 10-months from today’s signing (November 15th onwards) the US will be confirming compliance and may then consider reducing remaining tariffs. Evidently, the review over China’s compliance presents another downside risk in the form of them not having adhered fully/sufficiently to the terms, and as such prompting the implementation of additional tariffs.


• On this, White House Trade Advisor Navarro asserted that the Phase One deal will allow the US to swiftly reimpose tariffs if it unilaterally determines that China has broken any of its commitments, including purchase agreements. China Global Times opinion tweeted that China will surely follow up its commitment to increase imports from the US once barriers such as tariffs and other administrative measures are lifted.

Agreed Purchases:

• Sources confirmed that the US-China Phase One deal will include a pledge by China to buy USD 200bln of US goods over a 2-year period. This is said to include USD 50bln in energy, USD 40bln in agriculture, USD 35bln-40bln in services and USD 75bln in manufactured goods. SCMP note that questions remain as to whether China can achieve the USD 40bln in agricultural purchases that the Trump administration is touting. China is yet to officially confirms this.

Document Release:

• Mnuchin and Lighthizer have made it clear that all aspects of the Phase One deal are to be published today, unclear on the exact timing of this; however, the annex containing detailed purchase amounts will not be publicised. A withdrawal that may result in some, at-least initial, confusion over whether the deal misses, meets or exceeds expectations in terms of the purchase numbers. From a long-term perspective, this will make it more challenging for participants to accurately judge if China has been complying with the deal.

Phase Two

• Some desks note that the Phase One deal signing seems to be more theatre than meaningful change – noting that the semi-annual review as a simple return to conditions seen in 2016, whilst the dropped currency manipulation status is likely a move to acquire leverage against China alongside the majority of tariffs being kept in place.


• The actual format and timing of the Phase Two deal is not yet known. US Treasury Secretary Mnuchin alluded late last year that Phase Two negotiations will begin after Phase One is out of the way, but may be compartmentalised – “Phase Two may be 2a, 2b, 2c, we’ll see, but this is unto itself a huge accomplishment for the president”, Mnuchin noted.


• US President Trump last week he might want to wait till after the election to complete Phase Two China trade deal, but also said the US will begin Phase Two talks straight away. China Global Times, in response, tweeted that a Phase Two trade deal after November is too far away and added that China's willingness to start Phase Two negotiations depends on the implementation of the Phase One deal; citing an expert close to the Chinese Government. Furthermore, Global Times citing the expert close to the Chinese government, stated that China is not in a rush to begin Phase Two talks if US President Trump criticises the country during his election campaign.

15 Jan 2020 - 16:05- Research Sheet- Source: Newsquawk