China and the U.S. Agree to a “Low-Hanging Fruit” Phase One Trade Deal as the Tariff Bandwagon Loses Steam

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According to multiple reports, the U.S. and China have agreed to a phase one trade accord that ensures concessions from both sides and offers global equity markets a critical boon before the crucial holiday session.

As per the details revealed, the U.S has provided following concessions to China regarding the tariff slabs detailed in the section 301 of the United States Trade Representative (USTR) website:

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  • Suspension of List 4B tariffs that were due to take effect this Sunday on $160 billion of consumer goods imports from China
  • Reduction of List 4A tariffs to 7.5 percent from the original 15 percent imposed on $120 billion of Chinese products on 1st of September
  • Preservation of tariffs included in lists 1 - 3 that cumulatively entail 25 percent tariffs on $250 billion of Chinese imports

China, for its part, has also suspended its reciprocal tariffs that were due to take effect this Sunday and which targeted a wide variety of American goods such as corn, wheat, U.S. automobiles as well as auto parts. Crucially, China will maintain all tariffs currently imposed on U.S. products.

In another concession detailed by the top U.S. trade negotiator Robert Lighthizer, China has provided commitments to purchase, over the next two years, $200 billion of additional U.S. products pertaining to the agriculture, manufacturing and energy sectors. China’s 2017 imports from the U.S. constitute a base line for this commitment. Lighthizer further elaborated that Chinese imports of U.S. agricultural products is expected to reach an annual pace of $40 billion to $50 billion within the next two years.

As a refresher, the United States exported around $24 billion in farm products to China in 2017 with $12 billion in Soybean cargoes constituting the largest agricultural export segment at the time. Following the eruption of a full-blown trade war in 2018, China drastically curbed its imports of Soybeans and other agricultural products from the U.S. and instead turned to Brazil for much of those products. Bear in mind that China imports Soybeans primarily to feed its large pig population. Since that time, however, China’s population of pigs has experienced a material reduction due to a widespread African Swine Fever infection that affected much of the country’s local hog population. Given this culling of the local pig population along with displacement of the U.S. by Brazil as the primary exporter of Soybeans, many experts remain skeptical that China will be able or willing to return to 2017 import levels.

The lack of details related to key commitments in this accord constitutes another challenge when it comes to its enforcement. As an illustration, the deal includes assurances from China to eliminate forced intellectual property transfers, uneven market access for foreign companies and a pledge to refrain from competitive devaluation of its currency. However, a detailed implementation plan and the thresholds for gauging adherence to these commitments have not been provided.

“[The deal] is a phased achievement, and does not mean that the trade dispute is settled once and for all,” said a Reuters source in Beijing while commenting on the situation.

This agreement still needs to be inked. Speaking to reporters on Friday, the U.S. Trade Representative Robert Lighthizer said that the U.S. and China aim to sign the agreement in January in Washington.

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Trump added on Friday that the U.S. would begin negotiations on the next phase of the trade deal “immediately, rather than waiting until after the 2020 Election.”

Since 2018, the U.S. and China have each imposed multiple layers of tariffs that affect bilateral trade worth billions of dollars, battering financial markets and roiling the global business and consumer sentiments in the process. Now that a thaw in this simmering conflict is on the horizon, markets have reacted positively. Last week, the Nasdaq posted weekly gains of 0.9 percent followed by gains by S&P 500 of 0.7 percent. The Dow was up by a more modest 0.4 percent on the week.

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