Phase 1 deal signed but trade doubts linger

Fitch Ratings expects the overall economy will still have to navigate significant risks and uncertainties in 2020 and beyond

By DASHVEENJIT KAUR / Pic By BLOOMBERG

THE Phase 1 trade deal between the US and China will boost market confidence and stabilise global growth, but risks remain on whether both parties could uphold their end of the bargain.

Fitch Ratings Inc stated that full impact of the partial agreement will depend on the implementation of the deal, including whether China could meet its commitment to increase imports from the US and trade diversion effects on other exporting economies.

“Phase 1 deal pauses but does not end the US-China trade war, and leaves the effective US tariff rate on Chinese imports far higher than two years ago.

“Such a sharp increase in imports from the US could directly affect Chinese GDP through lower net exports, depending on how much is offset by higher demand or lower imports from elsewhere,” it said in a report last Thursday.

Trade diversion also impacts economies that might lead to a long-term damage in global productivity, said Fitch Ratings.

“The trade deal reinforces our expectation that global growth will stabilise this year. We do not forecast a near-term rebound in manufacturing, but services sector activity and consumer spending in the advanced economies have been resilient, supported by tight labour markets and growing household income,” it added.

Fitch Ratings added that there is little evidence to date of a significant slowdown in US consumer spending.

“Employment, wage growth and consumer confidence levels suggest that a more powerful spillover from manufacturing weakness to consumption is unlikely,” said the rating agency.

The 86-page agreement signed on Jan 15, 2020, includes pledges that China will enhance intellectual property protection and address forced technology transfer, as well as both parties will refrain from competitive currency devaluations.

The two sides announced that they had reached an agreement on Dec 13, 2019 — two days before higher US tariffs on Chinese imports were due to take effect.

It also said Chinese imports of various goods and services from the US should exceed the 2017 level by at least US$200 billion (RM810 billion) in 2020 and 2021 combined.

“Imports from the US are targeted to increase by US$77 billion from the 2017 baseline in 2020, and by US$123 billion from baseline in 2021, with the largest increases for manufacturing and energy.

“As expected, the Phase 1 deal will see the effective US tariff rates fall to about 16%, compared to a rise to about 25% if all the planned tariff increases announced by the US in August 2019 had been implemented,” Fitch Ratings said.

The agency added that the deal was preceded by other signs of an easing in US-China economic relations, including the removal of China’s designation as a currency manipulator by the US Treasury Department and reports that semi-annual economic discussions between the two states would be revived.

“But it is unclear whether China can buy, or the US to supply, additional goods and services on the scale set out in the Phase 1 deal.

“Moving to negotiations on a ‘Phase 2’ agreement is conditional on implementing Phase 1, and these talks would cover contentious areas such as structural economic reforms in China,” it said.

Fitch Ratings expects the overall economy will still have to navigate significant risks and uncertainties in 2020 and beyond.

National Australia Bank head of markets strategy for Asia Christy Tan said the trade weather has improved, but there are still dark clouds hovering in the horizon.

“The questions is whether the US president will ratchet up trade tension again in the next few months, or could the ongoing tech war escalate further,” Tan said in a note last Friday.