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US-China 'phase one' trade agreement creates more questions than answers

Do not pop the champagne corks just yet.

While stock markets responded positively to the Dec. 13 announcements of a "phase one" trade deal between the U.S. and China, there are a number of reasons to question what it means and even whether the agreement will get over the finish line. Differences in the statements out of China and the U.S., skepticism about the value of proposed purchases of U.S. goods by China, and uncertainty around any rollback of tariffs are all giving analysts pause before they welcome the announcement with open arms.

Chinese purchases

The U.S. said the deal will increase Chinese purchases of U.S. goods and services by $200 billion in 2020-2021 from $179.3 billion in 2018, but there is no mention of the figure in the Chinese statement, which says the deal can "help [expand] economic and trade cooperation between the two nations" while also stressing a U.S. commitment to phase out tariff increases on Chinese products in stages.

"It is hard to believe that China will buy an extra $200 billion of U.S. goods and services over the next two years based on such a small tariff relief," Allen von Mehren, chief China analyst for Danske Bank, wrote in a research note. "Especially since it means giving away all of their leverage on Trump in the form of purchases of farm products."

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The Office of the U.S. Trade Representative said in a fact sheet that China would purchase additional manufactured goods, food, agricultural and seafood products, energy products, and services, though it did not say how much of each.

U.S. exports of food and agricultural and seafood products to China were $17.97 billion in 2017 before the trade conflict erupted but had fallen to $9.97 billion in the 9 months ended Oct. 31, according to Panjiva, a trade analysis division of S&P Global Inc.

In return, the U.S. held off on 15% tariffs on roughly $160 billion of goods that were set to go into effect Dec. 15 and reduced by half the 15% levies on $120 billion of Chinese apparel, consumer electronics and shoes that it had implemented in September.

'Start buying now'

All other tariffs would remain in place, and the USTR office denied a Wall Street Journal report that the U.S. offered to cut by as much as half tariffs on roughly $360 billion of Chinese goods in exchange for purchases by Beijing.

The two countries also have a poor record of implementing previous agreements on goods purchases. President Donald Trump said in October that China agreed to increase its purchases of U.S. agricultural goods to the tune of $40 billion to $50 billion, but there has been little evidence of any progress on that front. The latest data from Panjiva shows that U.S.-to-China movements of soybeans, a major product harmed by crippling retaliatory tariffs, fell to $5.56 billion in the year ended Oct. 31 after reaching $12.36 billion in 2017.

Trump told reporters Dec. 16 that he expected Beijing to "start buying now," according to pool reports.

Intellectual property

The nine-chapter deal, which is still subject to review and subsequent implementation, also includes measures that address U.S. concerns on Chinese intellectual property practices, forced technology transfer, and would create a dispute resolution chapter, according to the USTR office, but details are sparse.

Still, tariffs of as much as 25% remain in place on roughly $550 billion of Chinese goods, including on furniture, mattresses, PC components, and refrigerators.

U.S. retailers, in particular, want them gone.

"While this deal offers some relief, what retailers ultimately want is a deal that rolls back all tariffs and provides more certainty and predictability heading into the new year," said Austen Jenson, senior vice president of government affairs for the Retail Industry Leaders Association.

That is not likely until a "phase two" trade agreement between the U.S. and China is done. The specific focus of those negotiations is not yet clear.

Economic damage

The phase one deal would boost China's annual GDP growth by 0.2 percentage point, while the main implication for the U.S. would be that consumers would be spared the rise in product prices, according to Capital Economics.

If the Dec. 15 tariffs had gone into effect, projected global GDP would have been lowered by 0.5 percentage point, while the latest deal will increase global growth by less than 0.1 percentage point, the forecaster said.

The details on the phase one deal are "sketchy" said Jennifer McKeown, the head of global economics service for Capital Economics. McKeown said she was "not convinced that it will hold."