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Market faith in US-China trade deal is misplaced


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Seasonal cheer has spread through capital markets. More encouraging US economic data and the announcement of a “phase one” trade deal between Washington and Beijing have lifted the confidence of investors, businesses and consumers.

This euphoria looks misplaced, however. Investors betting on a positive conclusion to the US-China trade saga are still likely to be disappointed.

Under the trade mini-deal, China is promising to increase its imports from the US, such as agricultural purchases. Beijing’s other pledges include better enforcement of intellectual property rights and the opening up of the country’s financial services sector.

These concessions have been made in exchange for the suspension of the threatened December tariffs from the US on Chinese imported consumer goods and a partial rollback of the September tariffs.

This initial agreement reinforces prospects for a “soft landing” for the US economy in 2020, when business investment and consumer spending are expected to slow. Yet markets’ cheery holiday mood — with global stocks hitting record highs on the news of the accord and the S&P 500 set for its best year since 2013 — could easily turn sour.

For one thing, the lift to US and Chinese prospects from the phase-one deal is modest. With only a partial rollback of existing US tariffs on China, its boost to US growth next year will be marginal at best. It barely moves Oxford Economics’ existing 1.7 per cent US growth forecast for 2020. Suspension of the threatened December import tariffs on $160bn of Chinese consumer goods removes a drag on US gross domestic product of about 0.2 to 0.4 percentage points: scant comfort.

In China, the reduction in tariffs would bolster flagging growth, with some boost to confidence and sentiment. But we expect that to be offset by Beijing holding off — as confirmed by this month’s key Chinese policy-setting conference — from further big policy moves and remaining cautious on any extra economic stimulus. Overall, our forecast for China’s growth next year is edged up a little to about 6 per cent.

Welcome though the small fillip for US and Chinese growth next year may be, it does virtually nothing to reverse the considerable damage already wrought by President Donald Trump’s trade conflict.

In particular, the mini-deal does little to dispel the dense fog of uncertainty that will continue to cloud US business and consumer activity next year. After 18 months of near-continuous escalation in trade tensions, it is hard to believe that either business leaders or consumers will react strongly to what is a frail trade agreement — and one that comes with strings attached.

Businesses and households should maintain a cautious bias through to the November 2020 presidential elections. They are well aware that new tariffs and protectionist measures could be reimposed at any time and on a political whim.

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The phase-one deal also carries a further sting in the tail for investors. The bar for the Federal Reserve to deliver any further interest rate cuts in the new year has now risen and markets will need to reprice their expectations for further Fed policy loosening.

Most importantly, this phase-one pact does not mean that the spectre of further US-China trade tensions has been exorcised — far from it.

Unless there is a dramatic strategy reversal from Mr Trump, it seems clear that his administration — and its large contingent of trade hawks — will want to cling on to the weapon of trade and technology protectionism as a means of pressing Beijing into more substantive concessions.

Even the limited phase-one agreement has faced resistance from some members of the administration and important details remain to be finalised between the two sides. In any such accord, there tends to be a gap in perceptions on what both sides have won and lost.

The risk remains substantial, therefore, of relations deteriorating once more and tariffs snapping back. This will be playing out against a background of rising tension and mistrust between the two countries, and in a US election year. Meanwhile, the fundamental driver of the trade tensions — intensifying economic, political and technological competition between the world’s two largest economies — will remain a dominant theme for decades.

Rosier economic data and the wave of positive trade rumours may be giving a seasonal boost to markets’ spirits. But the reality is much less merry than many assume. The limited benefits of this Christmas compact between the US and Chinese presidents means it may not, in reality, be quite the gift it may seem. The thaw in relations between these powers could easily prove shortlived, and give way at any time next year to a bleaker outcome.

The writer is chief US economist at Oxford Economics

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