Monday, January 20, 2020 / 08:49 AM / By Fitch Ratings/ Header Image Credit: Lanka Business Online
The signing of the US-China "Phase One" trade deal will boost business confidence and supports our view that global economic growth will stabilise in 2020, Fitch Ratings says. But its full impact will depend on how the deal is implemented, including whether China can meet its commitment to dramatically increase imports from the US, as well as possible trade diversion effects on other exporting economies.
The 86-page agreement signed on 15 January includes pledges that China will strengthen intellectual property protection and address forced technology transfer, and that both sides will refrain from competitive currency devaluations. It also says Chinese imports of various goods and services from the US should exceed the 2017 level by at least USD200 billion in 2020 and 2021 combined. Imports from the US are targeted to increase by USD77 billon from the 2017 baseline in 2020, and by USD123 billion from baseline in 2021, with the largest increases for manufacturing and energy.
The two sides initially announced that they had reached an agreement on 13 December, two days before higher US tariffs on Chinese imports had been due to take effect. As anticipated, the Phase One deal will see the effective US tariff rate fall to about 16%, compared with a rise to about 25% if all of the planned tariff increases announced by the US in August 2019 had been implemented.
A pause in the US-China trade war avoids further direct disruption to US-China trade from higher tariffs. Following the Phase One deal we now expect the Chinese economy to grow by 5.9% this year, 0.2pp higher than in our most recent Global Economic Outlook (GEO) published on 5 December, when we assumed that all the scheduled tariff increases announced in August 2019 would go ahead. This increase in our China forecast would, all else being equal, support global growth of 2.6% in 2020, an upward revision of 0.1pp from the December GEO, and unchanged from 2019.
The trade deal reinforces our expectation that global growth will stabilise this year. We do not forecast a near-term rebound in manufacturing, but service-sector activity and consumer spending in the advanced economies has been resilient, supported by tight labour markets and growing household income. We see little evidence to date of a significant slowdown in US consumer spending. Employment and wage growth and consumer confidence levels suggest that a more powerful spillover from manufacturing weakness to consumption is unlikely.
However, the Phase One deal pauses but does not end the US-China trade war, and leaves the effective US tariff rate on Chinese imports far higher than two years ago. Moreover, such a sharp increase in imports from the US could directly affect Chinese GDP through lower net exports, depending on how much is offset by higher demand or by lower imports from elsewhere. The effect on global growth will also depend on which economies are affected by any such trade diversion, which over the longer-term could damage global productivity.
The deal was preceded by other indications of an easing in US-China economic relations, including the removal of China's designation as a currency manipulator by the US Treasury Department and reports that semi-annual economic discussions between the two countries would be revived. But it is unclear whether China can buy, or the US supply, additional goods and services on the scale set out in the Phase One deal.
Moving to negotiations on a "Phase Two" agreement is conditional on implementing Phase One, and these talks would cover contentious areas such as structural economic reforms in China. The global economy will therefore still have to navigate significant risks and uncertainties in 2020 and beyond.