Skip to content

Phase One China Trade Deal: Key Issues Unresolved Until After U.S. Election

Katie Elizabeth Deal, Investment Analyst

Temporary détente suggests tensions could escalate

The “phase one” trade deal between the U.S. and China was presented by the Trump administration as an “historic and enforceable agreement that begins rebalancing the U.S.‑China trade relationship.” While the pact makes incremental progress on issues like purchases of U.S. exports and market access, it more likely signals a détente, suggesting that trade tensions between the two countries will remain a concern through the 2020 U.S. election cycle.

Rather than weather the market uncertainty of an ever‑escalating trade battle, both the U.S. and China left the most controversial terms of negotiation for the future: intellectual property rights, Chinese industrial policies, and Chinese state‑owned enterprises.

Tariff Threats Remain the President’s Preferred Enforcement Tool

The agreement resolves some thorny issues investors and corporations engaging with China face. China committed to stricter enforcement of previous and newly reformed laws that prohibit forced technology transfer from U.S. to Chinese firms. To handle claims of malpractice, the U.S. and China will establish a joint enforcement committee to reinforce the terms of phase one in practice.The pact also commits China to an incremental USD 200 billion purchase of agricultural, energy, services, and manufactured goods over two years, compared with the 2017 baseline imports from the U.S. These purchases expand total exports to China in politically critical industries.

China is expected to comply with the terms of the agreement—as is politically convenient—at least through this year.

Though the deal includes the formation of a joint committee to review and penalize bad actors, that committee is both novel and developing—meaning that its rules, procedures, and capabilities have yet to be realized. That lack of clarity incentivizes President Trump to continue his already‑liberal view of tariffs as a tool to build leverage in negotiations. If the president believes China is not holding up its end of the agreement, he may impose “snapback” tariffs that were removed as a part of the phase one deal.

Today, the phase one agreement’s most significant effect is the certainty on China trade it provided to equity markets. This should help provide the administration critical stability in an election year. Politically, the agreement gives the president the opportunity to highlight the fulfillment of a campaign promise.

China’s USD 200 Billion Buying Spree
China commitments for increased U.S. purchases1

As of December 31, 2019.
Sources: U.S. White House and Bloomberg Finance L.P. Used with permission of Bloomberg Finance L.P.
1 Chart depicts China commitments for additional purchases for each category on top of the 2017 baseline imports from the U.S.

Challenges Facing Phase Two

The certainty and stability provided by phase one will fade in 2021. While a Democratic president may be more focused on human rights violations, either a second‑term President Trump or a newcomer to the White House will face immense political pressure to prove that China’s behavior has changed before considering additional tariff relief.

And, as time progresses, the president will face more pressure from an increasingly hawkish Congress to address the difficult issues left unresolved by the phase one deal: U.S. disputes over China’s sponsorship of industry “champions” and state‑owned enterprises with unfair market advantages and China’s widespread investment in critical infrastructure projects in developing countries (the Belt and Road Initiative), which provides increasing control over supply chains and technologies in those markets.

As China has developed and copied more sophisticated technologies in semiconductors, artificial intelligence, and biotechnology, the U.S. defense establishment has become increasingly concerned about China’s capacity to pose an economic and national security threat via critical technology supply chains. These increasingly prevalent challenges will continue to fuel the “tech cold war” between the two countries.

Given President Xi Jinping’s focus on surpassing the “middle income trap,” China will protect its long‑term growth and expansion goals—refusing to demur to unilateral demands made by the U.S. Until additional pressure from multilateral actors can reinforce the United States’ positions on China, significant and long‑lasting changes by China will remain elusive.

Important Information

Where securities is mentioned, the specific securities identified and described are for informational purposes only and do not represent recommendations.

This material is being furnished for general informational purposes only. The material does not constitute or undertake to give advice of any nature, including fiduciary investment advice, nor is it intended to serve as the primary basis for an investment decision. Prospective investors are recommended to seek independent legal, financial and tax advice before making any investment decision. T. Rowe Price group of companies including T. Rowe Price Associates, Inc. and/or its affiliates receive revenue from T. Rowe Price investment products and services. Past performance is not a reliable indicator of future performance. The value of an investment and any income from it can go down as well as up. Investors may get back less than the amount invested.

The material does not constitute a distribution, an offer, an invitation, a personal or general recommendation or solicitation to sell or buy any securities in any jurisdiction or to conduct any particular investment activity. The material has not been reviewed by any regulatory authority in any jurisdiction.

Information and opinions presented have been obtained or derived from sources believed to be reliable and current; however, we cannot guarantee the sources' accuracy or completeness. There is no guarantee that any forecasts made will come to pass. The views contained herein are as of the date written and are subject to change without notice; these views may differ from those of other T. Rowe Price group companies and/or associates. Under no circumstances should the material, in whole or in part, be copied or redistributed without consent from T. Rowe Price.

The material is not intended for use by persons in jurisdictions which prohibit or restrict the distribution of the material and in certain countries the material is provided upon specific request.

It is not intended for distribution to retail investors in any jurisdiction.

202002-1090376

Download

Audience for the document: Share Class: Language of the document:
Download Cancel

Download

Share Class: Language of the document:
Download Cancel
Sign in or register to view more information.
Once registered, you'll be able to start subscribing.

By clicking the Continue button, I acknowledge that I have read and accepted the Privacy Notice

Continue Back

Change Details

If you need to change your email address please contact us.
Subscriptions
OK
You are ready to start subscribing.
Get started by going to our products or insights section to follow what you're interested in.

Products Insights

GIPS® Information

T. Rowe Price ("TRP") claims compliance with the Global Investment Performance Standards (GIPS®) and has prepared and presented this report in compliance with the GIPS standards. T. Rowe Price has been independently verified for the twenty four-year period ended June 30, 2020, by KPMG LLP. The verification report is available upon request. A firm that claims compliance with the GIPS standards must establish policies and procedures for complying with all the applicable requirements of the GIPS standards. Verification provides assurance on whether the firm’s policies and procedures related to composite and pooled fund maintenance, as well as the calculation, presentation, and distribution of performance, have been designed in compliance with the GIPS standards and have been implemented on a firm-wide basis. Verification does not provide assurance on the accuracy of any specific performance report.

TRP is a U.S. investment management firm with various investment advisers registered with the U.S. Securities and Exchange Commission, the U.K. Financial Conduct Authority, and other regulatory bodies in various countries and holds itself out as such to potential clients for GIPS purposes. TRP further defines itself under GIPS as a discretionary investment manager providing services primarily to institutional clients with regard to various mandates, which include U.S, international, and global strategies but excluding the services of the Private Asset Management group.

A complete list and description of all of the Firm's composites and/or a presentation that adheres to the GIPS® standards are available upon request. Additional information regarding the firm's policies and procedures for calculating and reporting performance results is available upon request

Other Literature

You have successfully subscribed.

Notify me by email when
regular data and commentary is available
exceptional commentary is available
new articles become available

Thank you for your continued interest