Is COVID-19 turmoil endangering the US/China trade deal?

For most of 2019 fear of an aggressive trade war between the world’s two largest economies undermined sentiment. The escalating measures proposed by the US and China went against the decades of rising international trade that helped to power worldwide growth.

Just as last year was drawing to a close, President Donald Trump surprised analysts by announcing that the US and China had agreed to a “phase-one” trade deal. In a collective sigh of relief, economists’ raised their growth forecasts and investors pushed equities to record highs.

Phase-one deal

The “phase-one” agreement meant that the December tariffs were avoided and the US cut in half the 15% tariffs already in place on $120bn worth of Chinese goods.

Under the terms of the deal, China agreed to purchase more than $200bn worth of American goods over the next two years. Furthermore, China pledged “not to manipulate” its currency, reduce intellectual property theft and to greater foreign access to its financial services industry. Beijing also agreed to relax licensing, inspection and registration regulations that the Trump administration has long considered a barrier to enter.

While trade experts highlighted the difficulty in implementing and enforcing the agreement, the deal was hailed as a significant resetting of the economic relationship between the superpowers. There were promises of more to come; the outline for the second phase was due to include a focus on more structural issues including China’s industrial policy and state subsidies.

Volatility

The trade deal, however, was always going to be vulnerable in a presidential election year, adding uncertainty for the financial markets. The devastating medical and economic ramifications of the COVID-19 pandemic have once again ratcheted up tensions between the US and China, questioning the stability of the agreement. The pandemic’s disruption means that it is very unlikely that China will be able to meet its commitments to buy US products at the start of the year, further souring the relationship.

Over the past week, Donald Trump has become increasingly vocal about China’s response to the outbreak and has announced new possible measures, including breaking off trade ties, restrictions on investment flows and modifying supply chains.

Furthermore, the president has suggested that China’s leader, Xi Jinping, was behind a “disinformation and propaganda attack on the United States and Europe”. In addition, the Senate passed legislation that may prohibit the trading of foreign equity issues on American exchanges if the Public Company Accounting Oversight Board is denied access to historical financial data. However, this move does not “ban” Chinese stocks from trading in the US.

Blame game

The blame game, justified or not, is just starting and headlines like these are likely to multiply in the coming months. We are seeing some meaningful measures and initiatives announced by the US and China in the skirmishes. But for now, we don’t expect a full blown trade war. The world is unlikely to be able to cope with another trade war between the two countries. Yet from a sentiment perspective, which is the main driver of markets in the short term, these tensions are unhelpful and may add to volatility.

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