Jan 16, 2020 - Economy

The "phase one" deal isn't all that it seems

Vice Premier Liu He and President Trump after signing phase one

Vice Premier Liu He and President Trump after signing phase one Wednesday. Photo: Mark Wilson/Getty Images

There was limited fanfare from the stock market after President Trump and Chinese Vice Premier Liu He signed the "phase one" trade deal yesterday.

What happened: The 94-page document will roll back some U.S. tariffs on Chinese goods and see China increase purchases of U.S. goods and services by $200 billion over two years, but it leaves more questions than answers, experts say.

  • Still, it was enough to satisfy the market, which had been pricing in the deal for months.

Between the lines: The agreement does not spell out what goods China will buy or how it will reach the targets of $200 billion of increased spending on agriculture, energy, manufacturing and services from 2017's spending levels.

  • That's just one of the "big, giant gaping holes" in the agreement, says Chad P. Brown, a senior fellow at the Peterson Institute for International Economics.

The intrigue: The agreement does not touch on China's industrial subsidies, changes to its economic structure, or its tariffs on U.S. imports, leaving those in place along with about $360 billion of U.S. tariffs on Chinese goods.

That's a major issue for Montana wheat farmer Michelle Erickson-Jones.

  • "This deal ... makes American farmers increasingly reliant on Chinese state-controlled purchases," she said in a statement distributed by the trade group Farmers for Free Trade.
  • "The promises of lofty purchases are encouraging but farmers like me will believe it when we see it."

Yes, but: It was enough for Wall Street, which largely saw the signing as a relief. The Dow closed above 29,000 for the first time and the S&P 500 edged higher on the day.

  • “Whether somebody looks at this as big progress or little progress, it is something tangible and so the arrow is pointing in a direction that the market is comfortable with,” Chuck Carlson, CEO of Horizon Investment Services, told Reuters.

What's next: There's already talk of a "phase two" deal that could address some of the larger issues. However, the deal is likely to happen only after the 2020 presidential election.

The big picture: "This is an interim step to a very uncertain relationship between the U.S. and China," Brown told Axios during a call with reporters.

  • "Trade policy with China over past two years saw a substantial shift and it’s never going to go back, even with this deal."

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