After rounds of tenacious negotiations, China and U.S. finally signed the “historic” and enforceable “Economic and Trade Agreement” (Phase One Agreement) that requires commitments from both parties to address long-standing concerns such as intellectual property, technology transfer and currency, trade barriers, and etc. China shall also purchase an extra of US$ 200bn U.S. goods and services in the upcoming two years.
- First milestone. The Deal contains seven chapters, including intellectual property, technology transfer, trade in food and agricultural products, financial services, macroeconomic policies and exchange rate, expanding trade and bilateral evaluation and dispute resolution. We believe enforcement of the deal will act as the first milestone of China-US relationship in the new decade, which features simmering tariff chaos but intensified competition in almost all arenas as well as fragile confidence. Although economic rationale shall dominate to mutually benefit the two parties, we need to be prepared for deviations from that rationale from time to time, upsetting hard-earned business confidence.
- Import expansion from U.S. to China. The US$ 200bn increment through a two-year window encompassing manufactured goods (US$ 78bn), agriculture products (US$ 32bn), energy (US$ 52bn) and services (US$ 38bn). Targeted increment would imply challenging and much higher growth rates for U.S. imports than historical trend. We think the commitment is easier to achieve for some categories of goods, such as farm products, given China’s high import dependence on soybeans and agriculture supply structure of the two nations being more of complements than substitutes. For other categories, such as manufactured goods and energy products, however, maneuvered increase could prove more difficult. Services import growth could be driven by financial services, fees for use of IP, cloud services and etc.
- Challenges in implementing the Deal. To China, risks could involve 1) trade expansion causing disturbance to global trade flow and supply chain; 2) more intensive and international competitive landscape expediting elimination of weaker players; 3) institutional and cultural differences, or other unresolved issues.
- Technology decoupling prevails. Cooperation remains delicate. Although both parties agree to carry out scientific and technological cooperation “where appropriate”, the U.S. remains alert to China’s progress in technological innovation. The Deal prohibits state-supported or directed outbound foreign direct investment activities aimed at acquiring foreign technology in sectors targeted by its industrial plans that create distortion. Business environment could continue to be tense while cooperation should be handled with delicacy.
- Follow-up details and timetables to focus on. Phase One Agreement also specified timetable or deadline for certain commitment to be fulfilled within 30/60/90 days after date of entry. Financial services open-up marks 1 Apr 2020 as a deadline for slashing foreign equity cap or business scope limitations. Also, investors should follow future phases of negotiations between the two countries to address unsettled issues.
