After months of harsh rhetoric and tit-for-tat retaliatory tariffs, U.S. and Chinese negotiators officially have a Phase 1 trade deal in place. President Trump and Vice Premier Liu signed the agreement on Wednesday, January 15th. The deal establishes several key tenants. First, China will purchase an additional $200 billion/year in U.S. goods beyond the 2017 baseline ($187 billion), of which will include agricultural products ($32 billion), manufactured goods ($78 billion), energy commodities ($52 billion) and services ($38 billion). Second, the United States will halve 15% import tariffs on $120 billion worth of Chinese goods. The U.S. will also forego implementation of duties on $156 billion of Chinese imports originally set to come into place last December.
The phase 1 deal also establishes Chinese commitments to provide U.S. companies greater access to domestic financial services and to refrain from Renminbi devaluation. As a result, the U.S. treasury department officially removed the designation listing China as a currency manipulator. Protections around intellectual property have also been established. A 90-day dispute resolution process provides an avenue for Chinese or American negotiators to implement new tariffs in the case of non-compliance.
The phase 1 deal leaves much to be desired. The agreement does little to bolster sentiment that further deal-making has a strong chance of happening. Negotiations took far longer than expected and included relatively low-hanging fruit. On the other side, Chinese negotiators failed to achieve a broader cut in U.S. tariffs, which will remain on some $360 billion of Chinese goods. U.S. negotiators want to keep these import duties on the table in order to ensure Chinese compliance. The White House made it clear that further tariff reductions would not come until a phase 2 agreement is established. Not all was lost. The Trump Administration did manage to secure new rules around intellectual property theft and forced technology transfers. Relatively reciprocal concessions around the trade of dairy, beef and other ag products was also a positive.
Chinese Growth Weathered the Storm Better than Expected
Chinese economic growth enjoyed a relative period of strength through the 2H of 2019. This was no more clearly displayed than via manufacturing PMI totals, which managed to hold above 51 by the end of Q4 after bottoming out in contractionary territory mid-year (<50). Such a surge in output, which extended to the construction sector, was helped along by bouts of government stimulus. Chinese state lending to small, medium and large domestic banks recovered in June/July/August after dipping through early-Q2, which correlated with relatively weak import demand figures. State lending through Q4 2019 was still far outpaced by year earlier levels in a sign that independent economic activity could be managing to find a foothold.
The late-summer spending spree likely had a positive short-term influence on demand across a variety of commodities even through the month of December. Iron ore arrivals, an input for steel production, set yet another record, ending the month at 102 Mt, higher 6.82 Mt m/m and 14 Mt y/y. Oil demand was also strong with seaborne offtakes finishing at a near record 10.02 mbpd, falling just behind that of November (10.07 mbpd). It is unlikely that domestic product demand managed much of an increase given exports of gasoline and middle distillates remained elevated for a second straight month (1.06 kbpd). Demand for metallurgical coal, also an input for steel, flashed decidedly more opaque signals with arrivals up 0.47 Mt m/m, but broadly lower y/y, down 0.28 Mt.