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Trump's Partial China Deal to Have Few Economic Gains

Trump's Partial China Deal to Have Few Economic Gains
(Nuthawut Somsuk/Dreamstime)

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Monday, 14 October 2019 09:40 AM Current | Bio | Archive

A U.S.–China agreement on what might generously be described as a "partial" trade deal took place on Friday. The deal was very limited in scope.

The main point for investors is that the burden of yet more trade tariffs/taxes will not be placed on U.S. companies and consumers this month.

Avoiding a trade tariff/tax is also good news for the global economy. Avoiding a trade tariff/tax is also good news for global equity markets as the burden of a tax/tariff on trade falls very heavily on listed equity companies.

Markets had at least partly expected this tax to take place and so avoiding the, what we could call, the “October tax” should lead to a somewhat positive reaction.

  • The “September trade tariffs/taxes” stay in place.
  • The threat of “December tariffs/taxes” also stays in place.
  • There are more talks scheduled in November.

U.S. stock index futures fell back as hopes of a quick resolution to the U.S.-China trade war were dashed by a report that China wanted more talks before signing a partial deal that was announced by President Donald Trump on Friday, Reuters reported.

Even if one takes an optimistic view and assumes a further trade agreement can be reached, the economic gains for the United States from any further trade agreements are likely to be limited.

There are also a couple of issues that are of interest:

First, the longer trade tariffs/taxes go on, the more they are likely to be evaded. There is plenty of evidence that companies are rerouting supply chains to avoid the past trade tariffs, which of course reduces the impact of past trade tariffs which is good/positive in a rather inefficient way of doing things. However, it also reduces the impact of removing of past trade tariffs.

Second, there is the question of "trust."

The world trade order has been shattered by the scale of U.S. tariff increases in recent times. It seems unlikely that companies will completely believe assurances from the United States that all is well in the world of trade and that will add a risk premium.     

Over in the UK,  the interminably tedious EU-UK divorce process is looking less and less likely to come to an end and more and more likely to go on and on in its traditional interminable manner. The temporary flicker of hope that emerged on Friday has been stuffed out by two forces:

First, the European Union appears to be unhappy with the British Government’s proposals for the Irish border, not at least because it seems that no one really understands how they would work. Modern trade is extremely complex with long and involved supply chains and this does not appear to have been factored in to the British plans to date.   

Second, opposition to the deal reportedly has emerged in the British Parliament and as the British Parliament has to decide on the deal that is something of a stumbling block.

The British pound lost some of the gains that were made on Friday.

Besides all that, Chinese imports and exports have both weakened in September which is basically in line with expectations. Exports fell 3.2 percent from a year earlier after falling 1.0 percent in August while imports fell 8.5 percent on the year, after falling 5.6 percent previously. 

The holidays and industrial shutdowns related to China’s 70th anniversary celebrations have for an important part led to the negative numbers while a further slowdown in demand from the United States also contributed to the negative numbers.

Markets are unlikely to pay too much attention to these data.

In Europe, Euro Area industrial production was up by 0.4 percent in August on a monthly basis and was down 2.8 percent on a yearly basis. September will need an improbably sharp monthly rise in excess of 2.6 percent just to keep the third quarter output flat.

No, the Euro Area isn’t out of the woods yet.

Etienne "Hans" Parisis is a bank economist who has advised investors on financial markets and international investments.

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Even if one takes an optimistic view and assumes a further trade agreement can be reached, the economic gains for the United States from any further trade agreements are likely to be limited.
trump, china, deal, trade, economic, gains
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2019-40-14
Monday, 14 October 2019 09:40 AM
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