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US-China phase 1 deal is just going back to square one


By Giles Coghlan, Chief Currency Analyst at HYCM

Via Reuters

The October 11 trade announcement by the US and China is a significant move in the trade war between the two countries that has threatened to drag down global growth and spark a global recession. So, the 'phase 1' deal is welcome news in relieving the pressure. The 'phase 1' deal is due to be signed on November 16 at the summit of the Asia Pacific Economic Cooperation countries in Chile. However, there are some limitations to the deal that are worth pointing out to temper or contextualise the optimism:

    • The October 11 deal is largely sentiment with few details on what will be agreed and we know that China is keen for 'more discussion' ahead of the signing of the deal.
    • The tit for tat tariffs have not been wound back. The US have just said that they won't lift tariffs to 30% from 25% on about $250bln in Chinese goods that was supposed to have gone into effect yesterday.
    • China buying $50bln of US farm products seems optimistic.
    • Prior to the trade dispute about 50% of all US agricultural exports to China were soybeans . About 2.7 million tonnes were imported in 2017/2018 season and that dropped to 13 million tonnes in 2018/19 season. So, if China returns to buying 28 million tonnes of soybeans a year this would be worth just under $10bln at the current futures price of 936 cents a bushel.
    • The above point means that there would need to be an enormous increase in shipments of not only soybeans, but also hogs, beef, poultry and nuts.
  • There was no mention of energy in the deal. Look at the chart below from Reuters and you can see the drop in energy exports to China after the trade dispute broke out. This will presumably be mentioned in 'phase 2' of the deal. See below:

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Source: https://www.forexlive.com/news/!/us-china-phase-1-deal-is-just-going-back-to-square-one-20191016
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