US-China Trade Tensions Eased But Not Resolved


Wednesday, December 18, 2019 10:45 AM / By Fitch Ratings / Header Image Credit: Compliance Week


The "Phase One" trade deal reported to have been reached between US and Chinese negotiators offsets much of the damage done to global trade and activity prospects from earlier US plans to raise tariffs in October and December, according to Fitch Ratings. Nevertheless, trade tensions remain high and renewed escalation remains a significant risk.


Official statements indicate that the effective US tariff rate on imports from China will fall to around 16% under the plan, compared with earlier plans that would have seen it rise to around 25%. This represents a significant shift compared with our earlier assumption that the full set of tariff increases announced by the US in late August would be implemented. As a result, we now expect China's economy to grow by close to 6% in 2020, compared with our earlier forecast of 5.7%. This will, in turn, support the outlook for the global economy, helping world GDP growth to stabilise in 2020 after falling to 2.6% this year from 3.2% in 2018.


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The trade war nonetheless appears far from over, even with a Phase One deal. The effective US tariff rate on Chinese imports will remain well above the level of around 3% prior to the launch of the trade war. Meanwhile, Fitch believes that underlying strategic tensions will remain between the US and China, particularly in fields such as technology, which will pose a major obstacle to full resolution of the trade war.


Against this backdrop, there is a risk that the Phase One deal will not be a lasting one. Neither side has yet provided a detailed explanation of the agreement, which makes it difficult to determine how viable it will be to implement. Parts of the plan that have been publicly discussed, such as the US Trade Representative's statement that China has committed to raise imports of "various US goods and services" by at least USD200 billion in total over 2020-2021, compared with their annual level in 2017, could, under certain interpretations, be very challenging to meet. Business investment prospects could improve globally in the event of a sustained de-escalation in trade tensions, but any such benefits are unlikely to be seen quickly given the volatile history of the trade conflict to date.


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China's domestic demand trends may further complicate efforts to raise imports from the US. Unless China's total imports accelerate sharply in 2020-2021, which seems unlikely given our assumptions of mild renminbi depreciation and a slight moderation of Chinese economic growth, any substantial increase in imports from the US will likely serve to divert trade from other import sources. This would have adverse effects on other economies that export to China.


Fitch last affirmed China's sovereign rating in November 2019 at 'A+' with a Stable Outlook. The government's restrained use of credit easing in favour of more transparent, on-balance-sheet fiscal policy has provided support to the rating throughout 2019. If the conclusion of the Phase One trade deal serves to support near-term economic growth momentum in China, as we now expect, this could serve to allay concerns about the Chinese authorities' ability to achieve the growth targets associated with their long-standing goal to build a "moderately prosperous society" by end-2020. This in turn could reduce downside risks to the sovereign rating by decreasing the likelihood that policymakers might revert to the kind of credit-driven stimulus that would exacerbate the country's medium-term financial vulnerabilities.

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