The trade war between the U.S. and China has had a huge influence on short-term moves in the stock market for more than a year now. Whenever either of the two countries imposed new tariffs on trade goods, markets often responded negatively. Conversely, taking away tariffs got positive responses from investors, as did signs that the two nations might be closer to reaching a more comprehensive deal. The rally in the stock market since mid-December has come largely from expectations that the Phase 1 agreement that President Trump just signed would be an important step forward in U.S.-China relations.
We're just now getting some details about what exactly is in the agreement. Although it doesn't cover all the areas on which the two nations disagree, it nevertheless has a lot of promise and addresses a wide range of issues that could have positive impacts on the economies of both the U.S. and China.
The 8 articles of the Phase 1 deal
The Phase 1 trade deal is 89 pages long and it broken down into eight articles. They cover the following topics:
- Article 1 covers intellectual property and affirms commitments toward protecting trade secrets, confidential business information, patents, e-commerce piracy and counterfeiting, unlicensed software, bad-faith trademarks, and pharmaceutical-related intellectual property rights. The provisions discuss handling of disputes through civil and criminal cases, as well as how the two countries will work together to implement and enforce these restrictions.
- Article 2 deals with technology transfer. The gist of the agreement here is to make it possible for companies in one country to have access to markets in the other country without having to make technology transfers that could threaten their proprietary information and intellectual property.
- Article 3 addresses food and agricultural products, with long descriptions related to food safety, infant formula, poultry, pork, fish, rice, pet food, and other items. According to U.S. Trade Representative Robert Lighthizer, China will spend an extra $32 billion on U.S. agricultural goods in 2020 and 2021.
- Article 4 covers financial services. Provisions seek to expand banking, credit rating services, electronic payments, distressed debt, insurance, and securities business activity between the two nations.
- Article 5 deals with macroeconomics and exchange rates, with provisions intended to support transparency and avoid some of the allegations of currency manipulation that have occurred in the past.
- Article 6 is titled "Expanding Trade" and sets forth a host of areas in which the two nations agreed to explore trade opportunities. That includes a general commitment to boost Chinese purchases and imports by $200 billion, spread across areas that include manufactured goods ($77.7 billion), energy products ($52.4 billion), and services ($37.6 billion), as well as the agricultural commitments listed above.
- Article 7 gives some details on dispute resolution and evaluation of how the agreement is going.
- Article 8 includes legal and technical details of the agreement.
In exchange for the greater commitments from China for purchasing goods and services, the U.S. will reduce the rate on tariffs it imposed back in September 2019 on $120 billion in Chinese goods by half, to 7.5%. U.S. tariffs on another $160 billion in goods that were slated to go into effect in December will remain on hold, along with the Chinese response to those tariffs.
However, some tariffs will remain in place. In particular, early tariffs of 25% on about $250 billion in Chinese goods won't go away, with the expectation that they will remain as bargaining chips for a subsequent Phase 2 deal.
What the deal means for investors
The Phase 1 agreement removes one piece of uncertainty that many investors had: whether the White House would be able to make good on commitments to reach any sort of formal trade agreement at all. Despite multiple reassurances in recent months, market participants had reacted negatively to news of setbacks along the way, and some expressed cynicism about whether the parties were serious about reaching any true compromise.
The Phase 1 agreement isn't perfect, and it only goes so far toward resolving the issues between the two nations. Moreover, some concerns still exist between the U.S. and other trade partners. But the deal with China serves as evidence that a trade agreement is achievable, and that could create the positive momentum necessary to lead to further breakthroughs in the future -- and lift investor sentiment for both U.S. stocks and Chinese stocks in the process.