China Pledges To Buy $200 Billion Of American Goods Under Phase One Trade Deal

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Topline: With the Phase One trade deal signing scheduled for tomorrow, new details have emerged about China’s pledge to significantly ramp up purchases of U.S. exports including manufactured goods, food, farm products, energy and services, sources told Reuters. 

  • The Phase One deal includes agreements on intellectual property, technology transfers and currency, as well as explicit commitments from China to buy at least $200 billion of U.S. exports over the next two years, according to a U.S. Trade Representative document
  • The numbers are expected to be confirmed on Wednesday at a White House signing ceremony between U.S. President Trump and Chinese Vice Premier Liu He, according to Reuters. 
  • The target for manufactured goods is the largest with China pledging to spend an additional $80 billion on U.S. autos, auto parts, aircraft, machinery, medical devices and semiconductors. China will also buy over $50 billion more in energy supplies and around $35 billion more of U.S. services.
  • Chinese purchases of U.S. agriculture products (a critical component of the Phase One deal) will increase by $32 billion, or $16 billion a year, sources told Reuters. That’s still short of the $50 billion annual goal called for by Trump, however.
  • According to the USTR document, purchases of American exports will continue beyond the two-year period: “China’s increased imports of U.S. goods and services are expected to continue on this same trajectory for several years after 2021 and should contribute significantly to the rebalancing of the U.S.-China trade relationship.”
  • Stocks were mixed following the news on Tuesday: The S&P 500 and Nasdaq Composite indexes both traded down by 0.15% and 0.24%, respectively, while the Dow Jones Industrial Average gained 0.11%.

Crucial quotes: “The market is skeptical on the benefits of the deal, but relieved at the reduced chance of an escalating trade war,” says Charlie Bobrinskoy, head of Ariel Investments. “Most of the details have been leaked, so there are some decent-size numbers in terms of agricultural purchases—and that’s one sector that should benefit from this—but overall we’ll see more of a return to pre-trade-war levels of Chinese purchases rather than significant new markets.”

“The fact the U.S.-China trade war isn’t escalating further is certainly beneficial, but stocks are largely already reflecting ‘Phase One’ in full,” wrote Adam Crisafulli, founder of Vital Knowledge, in a note on Tuesday. He predicts that the Phase One signing ceremony “will contain a lot of rhetoric and theater,” but investors “shouldn’t conflate that with substantive change—Washington is keeping the majority of its tariffs in place and the U.S.-China relationship is set to stay fraught for the foreseeable future.”

What to watch for: Such a large increase in Chinese imports of U.S. goods has raised some skepticism on Wall Street. USTR Robert Lighthizer told Fox Business yesterday that China’s commitments would be monitored closely: “We expect them to live up to the letter of the law,” he said. “We’ll bring cases, we’ll bring actions against them if they don’t.” The South China Morning Post reported on Tuesday, however, that the Phase One deal is “more of a political document than an economic road map with little chance it will inspire a meaningful phase two agreement any time soon.”

Further reading: Stocks Hit New Highs As Trade Deal Nears Signing

Trump: Phase One China Trade Deal Could Be Signed ‘Shortly’ After January 15

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