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Why China Trade Deal Won’t End the Trade War

Mohit Oberoi, CFA - Author

Dec. 13 2019, Published 7:34 a.m. ET

  • Reportedly, President Trump signed phase one of the China trade deal. If the trade deal gets completed, it would be President Trump’s second major trade deal this week. The US, Canada, and Mexico signed the USMCA for the second time.
  • Although phase one of the China trade deal won’t end the US-China trade war, it will help restore market sentiments. Stock markets have run-up in the fourth quarter amid trade deal expectations.
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US-China trade talks and stock markets

The US-China trade war is almost two years old. In some respects, the trade war is decades old. China has taken advantage of the US on trade issues. There have been several ups and downs in the US-China trade talks. At times, a trade deal looked like it was in sight. There were also instances when the two countries appeared to reach a point of no return. In October, the US and China decided to split the deal into phases. Stock markets rallied in October and the uptrend continued in November. The S&P 500 (SPY) and the Dow Jones Index (DIA) hit record highs. Similarly, stock markets fell whenever the trade talks broke down.

Phase one of the China trade deal

Phase one of the China trade deal looks certain. According to reports, President Trump signed phase one of the trade deal. China will buy massive amounts of US farm goods. The December 15 tariffs would also be delayed as part of the deal. The US will also lower some of the existing tariffs. US stock markets rallied on Thursday amid signs amid the progress. Earlier this week, the US, Mexico, and Canada signed the USMCA. The new agreement incorporates the Democrats’ changes. The USMCA will replace NAFTA, which President Trump criticized during his 2016 campaign. Read Will the USMCA Help Trump’s 2020 Reelection Chances? to learn more.

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Chinese imports and Trump’s tariffs

President Trump maintained that China needed a trade deal more than the US. Yesterday, he tweeted, “Getting VERY close to a BIG DEAL with China. They want it, and so do we!” For the first time, President Trump said that the US needs the trade deal. So far, China hasn’t confirmed phase one of the trade deal. Since billions of dollars of Chinese imports attracted tariffs, it hit China’s exports to the US. The US exports to China also fell. However, China’s exports to the US fell more due to the massive trade imbalance in China’s favor. Read China Trade Data Shows Trade Surplus Narrowed to learn more.

Will the trade war end?

Despite phase one of the trade deal, it isn’t the end of the trade war. First, some of the biggest issues like China’s massive state subsidies under the Made in China 2025 program haven’t been addressed yet. Issues related to forced technology transfers haven’t been resolved either. While China always appeared open to addressing the trade deficit issue, the US focused on structural issues. I don’t think that these contentious issues will get resolved anytime soon.

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US-China relations and China trade deal

From Huawei to Hong Kong and Uighur issues, flashpoints have increased between the world’s two biggest economies. CNBC reported that Wang Yi, China’s Foreign Minister, said, “Such behavior is almost paranoid, and is indeed rare in international exchanges, seriously damaging the hard-won foundation of mutual trust between China and the United States, and seriously weakening the United States’ international credibility.” He was speaking about the Hong Kong and Uighur issue. The US has taken a stance against China. Read US-China Trade War: There’s No Miracle Deal to learn more.

Cold War 2.0

Even with phase one of the trade deal, US companies will be cautious about future investments in China. Gradually, more US companies will try to explore suppliers beyond China. Not many countries can replicate China’s manufacturing ecosystem. Also, while phase one of the trade deal is incrementally positive, the US-China trade war is the reality of this century. Read Cold War 2.0: Why It Looks Like a Real Possibility to learn more.

The USMCA took longer because the Democrats wanted an even better deal. The Democrats might not want to go soft on China either.


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