After three years of long-running trade tensions, the U.S. President Donald Trump and Vice-Premier Liu He, signed an initial trade agreement on 15 January at the White House. This ‘phase one’ agreement between the governments of the United States of America and the People’s Republic of China has seen markets rally to record highs.
What’s in the ‘phase one’ deal?
Key takeaways in the 96-page document include:
- Stronger intellectual property protections to end the forced hand over of technology;
- A commitment from China to buy more U.S. goods, including food & agricultural products; and
- Improved access to China’s financial services market for U.S. companies.
The agreement commits both parties to maintaining prudent macroeconomic policies, with China reaffirming it would be more transparent on any interventions that influence the strength of the yuan. Interestingly, the two sides have also committed to expanding trade between themselves.
It is worthwhile noting that protection of intellectual property rights and ending forced technology transfers are already amendments made to the Chinese legislature back in 2019 – China didn’t agree to anything new here.
Purchasing more food and agricultural products is new, although several commentators don’t believe the U.S. can produce enough to meet the targets in the agreement.
Opening up the financial services sector is something China has been doing since 2016, in order to bring capital flows into the country and to balance its falling trade surplus.
This phase one agreement leaves many other issues unresolved, such as state directed aid to critical industrial sectors like technology.
At the same time, several US Government agencies are on the verge of tightening restrictions on the Chinese telecom giant, Huawei.
For the moment, a cease-fire and dialogue are certainly preferable to the alternative of further escalation of trade and economic hostilities between the world’s two largest economies. However, as phase two negotiations commence and if the US uses non-tariff barriers to continue to exert pressure on China’s tech sector darlings, we fear the U.S.-China economic relationship will deteriorate. Expect conflicting and confusing pressures for years to come.
Investment portfolios are continuing to benefit from the bull market in equities. At the end of 2019 we shifted portfolios towards fund managers with greater valuation discipline, so we are comfortable with how portfolios look, but valuations of several parts of the market make us feel a little uneasy. The current reporting season will hopefully remind the market of fundamental performance with company earnings before it gets too far ahead of itself.
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