Trade Deal or No Trade Deal… Deal - October 14, 2019

Headlines bounced back and forth between optimism and pessimism last week, and movement in the market mirrored headlines. But by week’s end, the U.S. and China agreed in principle to a trade deal. A late Friday Wall Street Journal headline summed it up this way: “Trump Says U.S. Reaches ‘Substantial Phase One Deal’ With China.”

The U.S. will suspend new tariffs that had been set to go into effect on Tuesday, but tariffs scheduled to rise in December remain a possibility.

The first phase will address intellectual property, financial services, and purchases of about $40 to $50 billion worth of agricultural products by China, according to the president.

It’s a skinnier deal than the comprehensive reforms than had been hoped for earlier in the year. However, it represents substantial progress from August, when an escalation in tensions generated market volatility and dimmed hopes the two sides might bridge their differences.

It also puts in place a framework for future talks—a phase two and possibly a phase three.

The graphic below illustrates that China has more to lose in a trade war with the U.S. Yet, the trade war has hurt business confidence and slowed global growth, which has hampered capital spending and manufacturing at home.

Investor’s corner

The president has been focusing on trade. A re-negotiated trade deal called the U.S.-Mexico-Canada Agreement (USMCA) will replace NAFTA (the North American Free Trade Agreement).

By year-end, USMCA could receive approval by Congress, though the impeachment inquiry casts a cloud.

Trump also reached a limited trade agreement with Japan, which does not require congressional approval. It’s not as wide-reaching as the Trans-Pacific Partnership (TPP) the president rejected in 2017, but an agreement with Japan represents progress.

If we see additional headway with China, or at a minimum, tariffs in December are delayed, a headwind to the economy is reduced, which lends support to business confidence and U.S. economic activity.