China recently revealed a new set of tariff exemptions, following the announcement of agreement on the terms of a historic phase-one trade deal. In the past several quarters, the United States and China levied tariffs on each other’s goods, which resulted in a slowdown in global economy. As expected, this significantly affected the stock market.
Taking Foot Off the Pedal
After 17 months, trade tensions between Washington and Beijing are slowly easing, giving ample boost to the stock market. As part of the phase-one agreement, China didn’t proceed with the plan of imposing retaliatory tariffs of 25% on American autos. Also, the world’s second-biggest economy is expected to increase imports of American goods (agricultural, energy, manufacturing and others) by at least $200 billion over the next two years. The recent set of tariff exemptions include six U.S. chemical and oil products. This is expected to work as a goodwill gesture before the deal is signed.
The new exemptions have a lifespan of one year and are expected to come into effect on Dec 26. Notably, the tariffs that have already been levied are not likely to be refunded. The latest waiver incorporates products such as metallocene high-density polyethylene and linear low-density polyethylene. Moreover, several refined oil products that include white oil and food-grade petroleum wax are included in the list. White oil is primarily used in medicinal and pharmaceutical operations. Also, it has application in cosmetics, plastic and food industries.
The exemption on chemical products will help several U.S. companies with downstream operations. As such, Exxon Mobil Corporation XOM, Dow Chemical and other companies are expected to benefit from refined product exports. Phillips 66 PSX and Chevron Corporation’s CVX 50-50 venture, Chevron Phillips Chemical Company, is also likely to prove beneficial. China, having a huge market of refined products, can cause a change in the direction of trade flows. Supply from the United States, which was diverted to Europe and South America due to the trade war, will now likely resume its previous course.
Hydrocarbons Still on the Sidelines
Products like crude oil and natural gas are not yet included in the list of exemptions. China imposed a 5% tariff on oil shipments in September 2019, with an existing 25% tariff on liquified natural gas levied in 2018. This disrupted several contract opportunities for U.S. LNG exporters. However, Cheniere Energy, Inc. LNG and China Petroleum & Chemical Corporation SNP or Sinopec made a 20-year deal to supply 2 million tons per annum of LNG to China from 2023.
Opportunities in 2020
While investors are waiting for the deal to be signed within the first week of January 2020, the market is optimistic about the second phase that might include data localization, digital trade, cyber intrusions and cross-border dataflow.
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