The United States and China agreed in principle to a “phase one” trade deal that would ease the reciprocal tariffs that have been put in place over nearly two years.
- Washington has agreed to cancel a new round of 15 percent tariffs on $160 billion worth of Chinese products that were scheduled to go into effect on December 15. These tariffs would have been mainly on consumer goods.
- The United States will reduce existing tariffs of 25 percent to 12.5 percent on $250 billion in Chinese products.
- The United States will reduce existing tariffs from 15 percent to 7.5 percent. on another $112 billion in goods.
- China has made an oral agreement to purchase $40 billion in U.S. agricultural products in 2020, and an unspecified amount of other U.S. exports. However, China said that purchases of U.S. wheat, corn and rice will stay within the China’s existing import quotas so as not to disrupt its domestic farm sector. U.S. agricultural exports to China were $10 billion in the first 10 months of 2019, down from nearly $20 billion in 2017 before the trade dispute began.
- China agreed to broaden access to its financial sector.
- The deal is comprised of nine chapters: preamble, intellectual property, technology transfer, food and agricultural products, financial services, exchange rates and transparency, expanded trade, bilateral assessments and dispute settlement, and final clauses. However, neither government released specific text of any chapter, so details on sequencing, timing, enforcement mechanisms and other specifics remains unknown.
- The agreement will be formally signed in January. The tariff reductions will go into effect 30 days after the deal is signed. The U.S. said Phase 2 negotiations would begin in early 2020, and not wait until after the U.S. presidential election in November.
- The Phase 2 negotiations will begin to address the more difficult set of bilateral issues, including Chinese industrial policy, subsidies to Chinese state-owned companies, forced technology transfers and U.S. treatment of Chinese technology firms.
- The agreement may limit the collateral damage to Chinese exporters and U.S. importers, who have borne the costs of the tariffs. U.S. consumers would have faced the prospect of higher prices on consumer goods such as mobile phones, computers, toys and clothing.
- The agreement could benefit the Chinese economy – which is growing at its slowest pace in nearly three decades – by offering Beijing more flexibility to address structural risks in 2020.
- The trade deal would provide a reprieve to Asian exporters like Singapore, South Korea and Japan – which have experienced supply chain disruptions and been caught in the crossfire of Beijing-Washington tariff exchanges.
- If China lives up to its commitment to purchase a significant increase in U.S. agricultural products, other suppliers of these goods, such soybean farmers in Brazil and Argentina, could see a decline in their exports.
- Global companies can make short-term business decisions with greater clarify on the tariff situation in 2020. However, trade, investment and technology competition between the world’s two largest economies are the new normal.