Headed into this week, traders and market participants of all stripes were bracing for disappointing headlines around the “Phase One” deal between the Trump administration and Beijing.
The agreement – the first in what the White House insists will be a trio of mini-deals eventually summing to a comprehensive overhaul of the trade relationship between the world’s two largest economies – is set to be signed at a ceremony in Washington on Wednesday.
Long story short, the market is cautiously optimistic, but concerned that a “sell the news” dynamic could take hold once the details are released.
On Tuesday afternoon, a spate of new tariff headlines dented risk appetite.
Tariffs on China will remain in place until after the US election, despite the deal, Bloomberg said.
That’s something of a letdown. You’ll recall that in addition to the suspension of planned levies scheduled for December 15, the agreement slashed the tariff rate on some $112 billion in goods taxed from September 1. That concession from Trump left in place all of the other tariffs on Chinese goods. According Tuesday’s reporting, they will remain at least for another 10 months.
Everything from Treasurys to hog futures moved on the headlines.
US officials will review and possibly trim the tariffs at a later date, but sources denied any concrete plans to cut the existing levies beyond what was announced last month. Here’s Bloomberg:
The two sides have an understanding that no sooner than 10 months after the signing of the agreement at the White House Wednesday, the U.S. will review progress and potentially trim tariffs now in place on $360 billion of imports from China, the people said, declining to be identified because the matter is private.
The period of review, which is not expected to be specified in the deal’s text, is intended to give the Trump administration time to verify the Asian nation’s adherence to the terms of the pact.
If you’re looking for a simple graphic that explains where things stand, you’re out of luck. At this point, the situation is impossibly convoluted, but here is where we’ve been and where we are now:
To be sure, nobody thought any real progress on “Phase Two” would be made prior to the US election, despite Trump’s contention that he plans to visit Beijing to discuss next steps sometime over the next several months.
But confirmation that no further tariff relief is in the cards at least until November isn’t the best news, as it suggests that the vast majority of the barriers put in place over the course of the trade war aren’t going to come down.
That will weigh on sentiment and exert a mechanical drag on growth in 2020, perhaps limiting the extent to which PMIs can inflect and constraining any rebound in trade growth.