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Economy | US | Asia-Pacific

Where to after Phase One?

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A Chinese delegation headed by Vice Premier Liu He is scheduled to travel to Washington today to sign the first phase of the trade deal with the US on January 15. While the precise terms of the agreement have yet to be revealed, the substance of the agreement, which include a plan for lower tariffs and an increase in agricultural purchases by Beijing, was largely nailed down in mid-December and has generally been priced into markets.

 

Moving towards phase-two negotiations but timeline uncertain

  • US and China are reportedly finalizing a series of long-running corporate deals ahead of the phase one signing ceremony. PBoC Governor Yi Gang, Minister of Commerce Zhong Shan and executives from American and Chinese companies are also said to be attending the White House event (Source: Bloomberg), indicating a potential trade pact across a wide variety of areas.
  • China has pledged to fully open its oil and gas exploration sector. According to China’s resources ministry, companies with net assets of at least 300mn yuan can apply for licenses as part of a major reform. Along with the energy sector, China has been opening up its financial sector at an unprecedented pace since the start of the trade tensions as well.
  • President Trump has indicated he would like to start second phase negotiations right away, but these may not finish until the US election.

 

Tensions likely to continue, but tempered ahead of elections

  • Trade uncertainties may follow as phase one avoided addressing main structural issues such as technology, industrial subsidies and cyber theft. Following the sign-off of the first phase, focus may also change to whether the parties are implementing the agreement and the ways in which they will be enforced. As such, uncertainties may remain particularly high around the potential implementation review meetings.
  • However, major escalations and tariff hikes are not expected by Citi analysts. Electoral calculations may start playing a much larger role, and thus the magnitude of US trade actions may be limited to avoid harming reelection prospects.

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