President Donald Trump signed a phase one trade deal with China Wednesday, and the S&P 500 has made significant gains since the deal was announced back in December.
The SPDR S&P 500 ETF Trust (NYSE: SPY) is now up 3.4% since Dec.13 — but the deal may not have as big of an impact as many investors think.
The Phase One Deal
The headline that got the attention of investors related to the phase one deal is that Trump is easing back on some of his trade war tariffs and holding off on new tariffs for the time being.
As part of the agreement, the U.S. scrapped its plans to impose new tariffs on $160 billion in Chinese imports starting in mid-December. In addition, Trump cut U.S. tariff rates on $112 billion in Chinese goods from 15% to 7.5%.
Yet the phase one deal will have no impact on an additional 25% tariff on $250 billion in Chinese imports.
While the U.S. is cutting tariff rates, China has reportedly agreed to two major provisions as part of the phase one deal.
First, China has agreed to more protections for U.S. intellectual property, including not requiring U.S. companies to share their technology in order to do business in China. U.S. Treasury Secretary Steven Mnuchin said the phase one deal also includes an enforcement provision that allows Trump to increase tariffs if China does not honor its IP protection commitment.
China has also agreed to increase its purchase of U.S. goods and services by $200 billion over 2017 levels within the next two years, an increase of more than 50%. The White House said $50 billion of those purchases will be agricultural products.
Thorny Trade Issues Left On The Table
Unfortunately for the U.S. companies and farmers that are getting squeezed by the trade war, about 80% of the trade war tariffs will remain in place following the phase one deal.
To make matters worse, many experts believe the most difficult issues left to resolve between the two nations were not included in the phase one deal, including technological export controls, additional provisions on IP theft and heavy Chinese subsidies for its domestic companies that make it difficult for foreign companies to compete in China.
There’s no question the phase one trade deal and a reduction in tariffs is a step in the right direction for U.S. investors. At the same time, Trump may use the ongoing trade negotiations as part of his election strategy in 2020, and has even said he may prefer to wait until after the November election to complete the phase two deal.
While the phase one deal is good news for the market, investors are unlikely to see phase two any time soon.
Do you agree or disagree with these predictions? Email firstname.lastname@example.org with your thoughts.
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