Morning Brief – Signed, sealed, not delivered

Signed, sealed, not delivered

 

A trade deal is done between the US and China: call the IMF to tell them to change global growth forecasts; let emerging market currencies rally at the expense of overvalued safe-havens! Sadly not.

 

Whilst Trump didn’t give markets any last minute surprises by refusing to sign the document or kicking off that it was Vice Premier Liu He and not his counterpart General Secretary Xi that sighed the deal, the quiet in markets since its signing last night shows us the importance of the deal – low! There are two huge insufficiencies in the deal.

 

Firstly, the substance of the deal: at the core of the trade dispute and therefore phase 1 trade deal is agriculture. It is of particular importance to Trump because much of his voting base have already felt the impact of punitive tariffs on Chinese imports of such goods. The deal therefore pledges China to spend $32bn over the next two years on agricultural goods. That’s all well and good until we realise that on average last decade during the Obama years China spent $22bn annually on such goods anyway! Therefore the deal guarantees less trade than the free market had already facilitated. From this element and others, the conclusion is that the deal is so weak that it cannot be thought of as a resolution in any more concrete terms than a symbolic gesture.

 

Problem two: there’s no mechanism. The deal does not dictate how the underwhelming promises will be delivered leaving considerable doubt over whether the pledges made will translate into constructive trade. The lack of methodology also means we don’t even know whether China will lift extant tariffs on its importation of US exports including those on energy and soybeans (the largest historical component of US agricultural export to China). This exclusion cannot be considered an oversight, it must have been a deliberate redaction and likely one that is keeping tensions elevated between the two nations behind closed doors. With cloud surrounding the already insufficient deal, markets have not found the deal to be something to celebrate yet.

 

 

 

Discussion and Analysis by Charles Porter

Click Here to Subscribe to the SGM-FX Newsletter