China needs time to consider impact of tradedeal
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China needs time to consider impact of tradedeal

The Global Times reports that “with the signing of the phase-one trade deal between China and the US, the 22-month-long tariff escalation is tapering off, which will be a moderate boon to the world economy in 2020. However, seriously disrupted global supply lines are unlikely be repaired anytime soon.”

Lead paragraph

Bilateral trade between the world’s two largest economies will nonetheless remain at single-digit growth in the new year, as the deal leaves in place punitive tariffs on about $480 billion goods from China and the US, which will stymie business investment and revival of confidence in all major economies. 

Key notes from the article

  • For the US, the manufacturing sector will continue to struggle in the confusion created by the Trump administration’s tariffs.
  • Though China’s pledge to purchase more than $70 billion worth of goods and services in the agricultural, energy, and manufacturing areas in 2020 will help the US economy a little, most of the costs relating to the tariffs on Chinese imports will be borne by Americans, in the form of lower profits for US companies or higher retail prices for households.
  • The intelligence of American politicians in stubbornly refusing to abolish tariffs seems greatly in doubt.
  • The remaining duties will not only suppress US business confidence and the country’s manufacturing industry, but also function as a sword of Damocles hanging over Wall Street.
  • Investors are spooked by the tariffs and will not want to take a chance.
  • China will certainly need time – at least a couple of years – to see how the phase one agreement works out, particularly the trade pact’s ramifications in respect of local economic performance.
  • If the economy is adversely impacted, China’s government is highly unlikely to jump into so-called phase two negotiations with the US. 
  • The Chinese people welcome the ceasefire and resumption of dialogue to the alternative – a further escalation in trade and economic hostilities.
  • Washington must not count on phase two talks pressurizing China to change its basic economic structure. Last summer, talks between the two countries were in deadlock because Washington was asking for things that China could never agree to, that is the remaking of China’s entire economic system. 
  • Will the phase one trade deal lead to a stable and permanent economic and political relationship between the two economic giants? It’s too early to tell.
  • So long the US does not consider China as an antagonist, and the two countries try to build trust as equal negotiating partners, with respect for each other’s basic systems, there will be plenty of space to cooperate in many domains to the benefit of the world. 

FX implications

This is not positive at all for risk appetite, Wall Street or AUD/JPY. Many pessimists had warned that after an initial risk on knee jerk reaction tot he signing of the trade deal, the hard facts and lack of progress between the two nations will likely lead to a sell the fact scenario – perhaps the media is now front running such a move in market sentiment. much more of these headlines, we can expect corrections in risk-FX, such as a stronger yen.

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