U.S. and China tiptoe around holes in new trade agreement

by Reuters
Thursday, 16 January 2020 00:46 GMT

(Adds comment from U.S. Vice President Mike Pence)

By Jeff Mason, Andrea Shalal and David Lawder

WASHINGTON, Jan 15 (Reuters) - The United States and China signed an initial trade deal on Wednesday that will roll back some tariffs and boost Chinese purchases of U.S. products, defusing an 18-month row between the world's two largest economies but leaving a number of sore spots unresolved.

Beijing and Washington touted the "Phase 1" agreement as a step forward after months of start-and-stop talks, and investors greeted the news with relief. Even so, there was skepticism the U.S.-China trade relationship was now firmly on the mend.

The deal fails to address structural economic issues that led to the trade conflict, does not fully eliminate the tariffs that have slowed the global economy, and sets hard-to-achieve purchase targets, analysts and industry leaders said.

While acknowledging the need for further negotiations with China to solve a host of other problems, President Donald Trump hailed the agreement as a win for the U.S. economy and his administration's trade policies.

"Together, we are righting the wrongs of the past and delivering a future of economic justice and security for American workers, farmers and families," Trump said in rambling remarks at the White House alongside U.S. and Chinese officials.

Chinese Vice Premier Liu He read a letter from President Xi Jinping in which the Chinese leader praised the deal as a sign the two countries could resolve their differences with dialogue.

The centerpiece of the deal is a pledge by China to purchase at least an additional $200 billion worth of U.S. farm products and other goods and services over two years, above a baseline of $186 billion in purchases in 2017, the White House said.

Commitments include $54 billion in additional energy purchases, $78 billion in additional manufacturing purchases, $32 billion more in farm products, and $38 billion in services, according to a deal document released by the White House.

Liu said Chinese companies would buy $40 billion in U.S. agricultural products annually over the next two years "based on market conditions." Beijing had balked at committing to buy set amounts of U.S. farm goods earlier, and has inked new soybean contracts with Brazil since the trade war started.

Key world stock market indexes climbed to record highs on hopes the deal would reduce tensions, before closing below those highs, while oil prices slid on doubts the pact will spur world economic growth and boost crude demand.

Soybean futures, which traded 0.4% lower throughout much of the deal signing ceremony, sank even further after Liu's remarks, a sign that farmers and traders were dubious about the purchase goals.

The deal does not end retaliatory tariffs on American farm exports, makes farmers "increasingly reliant" on Chinese state-controlled purchases, and does not address "big structural changes," Michelle Erickson-Jones, a wheat farmer and spokeswoman for Farmers for Free Trade, said in a statement.

Trump and his economic advisers had pledged to attack Beijing's long-standing practice of propping up state-owned companies and flooding international markets with low-priced goods as the trade war heated up.

Although the deal could be a boost to U.S. farmers, automakers and heavy equipment manufacturers, some analysts question https://af.reuters.com/article/commoditiesNews/idAFL4N29J26S China's ability to divert imports from other trading partners to the United States.

"I find a radical shift in Chinese spending unlikely. I have low expectations for meeting stated goals," said Jim Paulsen, chief investment strategist at Leuthold Group in Minneapolis. "But I do think the whole negotiation has moved the football forward for both the U.S. and China."

Trump, who has embraced an "America First" policy aimed at rebalancing global trade in favor of U.S. companies and workers, said China had pledged action to confront the problem of pirated or counterfeited goods and said the deal included strong protection of intellectual property rights.

U.S. Speaker of the House of Representative Nancy Pelosi said Trump's China strategy had "inflicted deep, long-term damage to American agriculture and rattled our economy in exchange for more of the promises that Beijing has been breaking for years," in a statement.

Earlier, top White House economic adviser Larry Kudlow told Fox News the agreement would add 0.5 percentage point to U.S. gross domestic product growth in both 2020 and 2021.

Aviation industry sources said Boeing Co was expected to win a major order for wide-body jets from China, including its 787 or 777-9 models, or a mixture of both. Such a deal could ease pressure on the 787 Dreamliner, which has suffered from a broad downturn in demand for large jets, forcing the planemaker to trim production late last year.

CCTV, China's state-run television outlet, said the deal would satisfy China's increasingly demanding consumers by supplying products like dairy, poultry, beef, pork, and processed meat from the United States.

TARIFFS TO STAY

The Phase 1 deal, reached in December, canceled planned U.S. tariffs on Chinese-made cellphones, toys and laptop computers and halved the tariff rate to 7.5% on about $120 billion worth of other Chinese goods, including flat-panel televisions, Bluetooth headphones and footwear.

But it will leave in place 25% tariffs on a $250-billion array of Chinese industrial goods and components used by U.S. manufacturers, and China's retaliatory tariffs on over $100 billion in U.S. goods.

Market turmoil and reduced investment tied to the trade war cut global growth in 2019 to its lowest rate since the 2008-2009 financial crisis, the International Monetary Fund said in October.

Tariffs on Chinese imports have cost U.S. companies $46 billion. Evidence is mounting that tariffs have raised input costs for U.S. manufacturers, eroding their competitiveness.

Diesel engine maker Cummins Inc said on Tuesday the deal will leave it paying $150 million in tariffs for engines and castings that it produces in China. It urged the parties to take steps to eliminate all the tariffs.

Trump, who has been touting the Phase 1 deal as a pillar of his 2020 re-election campaign, said he would agree to remove the remaining tariffs once the two sides had negotiated a "Phase 2" agreement.

"They will all come off as soon as we finish Phase 2," said Trump, who added that he would visit China in the not-too-distant future.

Trump added that those negotiations would start soon, though in a Fox Business Network interview that aired on Wednesday evening, Vice President Mike Pence said: "We've already begun discussions on a Phase 2 deal."

(Reporting by Jeff Mason, Andrea Shalal and Dave Lawder Additional reporting by Echo Wang, Lisa Lambert, Susan Heavey Lisa Lambert and Doina Chiacu in Washington, Tim Aeppel in New York, Mark Weinraub in Chicago, Se Young Lee and Stella Qui in Beijing and Tim Hepher in Paris; Writing by Heather Timmons; Editing by Paul Simao, Leslie Adler and Richard Chang)

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