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Explainer: What the partial truce in the US-China trade war means for the global economy, and what comes next

SINGAPORE – Holding up a newly inked deal touted to end two years of tweets, threats and tariffs in a bruising trade war, United States President Donald Trump crowed over his China moment at the White House on Thursday (Jan 16) morning Singapore time.

Chinese Vice-Premier Liu He and US President Donald Trump shake hands after signing "phase one" of the US-China trade agreement at the White House in Washington.

Chinese Vice-Premier Liu He and US President Donald Trump shake hands after signing "phase one" of the US-China trade agreement at the White House in Washington.

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SINGAPORE — Holding up a newly inked deal touted to end two years of tweets, threats and tariffs in a bruising trade war, United States President Donald Trump crowed over his China moment at the White House on Thursday (Jan 16) morning Singapore time.

In hailing the widely anticipated partial truce between the world’s two biggest economies, he said: “Today we take a momentous step, one that has never been taken before with China.”

But international markets are still cautious at the signing of the 96-page “phase one” deal that Mr Trump once called his “big beautiful monster”. The trade war has roiled global trade since Mr Trump made the first move in the trade war in January 2018.

Various differences remain unresolved, and with US$360 billion (S$485 billion) in US tariffs on China still in place, markets and analysts worry that this first step in resolving the trade war may not significantly reduce the uncertainty it has inflicted so far.

Addressing the media on Thursday, Singapore’s Trade and Industry Minister Chan Chun Sing described Singapore’s “guarded optimism” over the phase one deal.

While the trade agreement allows the two countries to better understand how to work with each other, he said that Singapore “must be cognisant that there are still many differences between the US and China, ranging from their technologies, to how they organise their own production system, their R&D (research and development) and their economic system in general”.

“We should not overlook some of these differences that still remain, and we will have to watch this closely,” Mr Chan said.

Reactions to the deal have been mixed. Critics said that the concessions made by China had not been worth the disruption caused by the trade war, while others wondered if either side will hold up their end of the bargain.

Asian stocks dived on Wednesday, the first time this week, on the news that the US tariffs on China will remain in place until a second phase of the deal is concluded, presumably in November, around the time of the Nov 3 US presidential election. Asian stocks were more positive on Thursday.

Despite the doubters, Mr Trump and his lieutenants hail the partial truce as a win in their books — the agreement legally binds China to relieve the yawning trade deficit with the US, to not manipulate its currency, and to not misappropriate the intellectual property and trade secrets of US firms.

China’s Vice-Premier Liu He also lauded the deal and said that both sides will abide by the principle of equality and mutual respect, talking to each other when problems emerge, and accommodating each other's core concerns, Chinese state media reported.

While it is tempting to suggest that the worst of the trade war is over, some economists and business experts said that this is still far from the end.

Mr Alex Capri, senior fellow at the National University of Singapore (NUS) Business School, told TODAY: “We are a long way from the end. In the long term, there will be an acceptance that we are in a new era — that it’s going to be ‘co-operate in areas where we can co-operate’ and ‘do business in niches where we can do business’.

“But for everything else, it is a cold war.”

WHAT THE DEAL SAYS

The phase one trade deal commits China to seven key areas:

  1. Intellectual property: China has agreed to improve its intellectual property protections, and address US concerns over trade secrets, patents, trademarks and enforcement against pirated and counterfeit goods. A dispute resolution mechanism allows US companies to seek recourse, including prompt and effective enforcement.

  2. Tech transfer: China pledged not to force American companies to hand over their technology in order to access the China market, a first in a US-China trade deal over an issue that has long plagued bilateral relations.

  3. Agriculture: Trade barriers in food, agriculture and seafood will be lowered, paving the way for farmers in the US to export more to China. This would involve concessions on health standards previously imposed on American products including meats, rice, pet food and milk formula.

  4. Financial services: China agreed to open its financial sector to US competition, in areas such as e-payments, banking, insurance, securities, and credit rating services, so that financial service providers in the US can compete in China on a level playing field.

  5. Trade expansion: China will commit to import various American goods and services over the next two years, buying US$200 billion more than it did in 2017 — including cars, steel, aircraft, pharmaceuticals, oil and agriculture, as well as tourism and finance services.

  6. Currency: The US and China committed to stop unfair currency practices, by refraining from competitive devaluations and targeting of exchange rates while promoting transparency and providing mechanisms for accountability and enforcement.

  7. Settling disputes: Both sides agreed to a framework for alleged violations to be resolved in regular bilateral meetings by high-level officials, failing which enforcement and punitive measures such as unilateral tariffs can be taken.

WHAT IS NEXT

Unlike past US-China trade deals, which often led US officials to accuse China of breaking their promises, the current agreement is meant to hold China to its word.

“There is a real enforcement provision,” US Treasury Secretary Steven Mnuchin told Fox News on Sunday. “And if they don’t comply with the agreement, the president retains the authority to put on tariffs, both existing tariffs and additional tariffs.”

Observers said it remains to be seen if China will risk another escalation of the trade war amid weakness in its own economy, referring to earlier signs of China’s concessions to the US to reduce trade tensions. For example, last year, the Chinese trade surplus with the US fell nearly 20 per cent, or US$50 billion, compared with 2018.

Singapore Business Federation's chief executive officer Ho Meng Kit told TODAY: “When the two biggest economies engage in a protracted trade war, no one wins in the long run. Businesses have been plagued by weak demand and poor confidence over the last year.”

But Mr Ho noted that difficult issues remain untouched in the latest deal, such as the role of China’s state-owned enterprises and the generous subsidy schemes from its government to local businesses.

“Much of the tariffs that the US has already imposed on Chinese goods will also continue to weigh down sentiments and increase price burdens for consumers and companies,” he said.

THE DEVIL IS IN THE DETAILS

Others noted that the items that were covered in the partial deal address issues in ways that sound good on paper, but do little to cause meaningful change. For example, allowing market access to China’s financial market would hardly make a dent in incumbent players such as Alibaba and WeChat, Mr Capri of NUS Business School said.

Mr Tommy Xie, OCBC bank’s head of Greater China research, told TODAY: “As a relatively low-hanging fruit, intellectual property has been well-covered in the agreement — 18 pages out of 96 pages were dedicated to the chapter of intellectual property.

“However, only three pages covered technology transfer, which will be one of the key focuses in the phase two negotiations,” he added.

What the deal does show is that both sides are willing to come to the table and also buy time for real change to be made.

Referring to the terms in the deal which require China to buy US$200 more American goods and services over the next two years, including an additional US$32 billion purchase of agricultural products, Mr Xie said that it puts China in a more feasible position to fulfil what Mr Trump wants.

“Those two changes will reduce the implementation risks in 2020, which will buy more time for both countries to go deeper into the structural reform,” he said.

IMPACT ON THE WORLD

The phase two discussions, he added, will be keenly monitored by the business community. But for now, phase one’s impact on the rest of the world will likely be muted.

“No breakthrough is expected in 2020 as the US heads into the election year. Therefore, we expect the US-China trade tensions to continue to affect business sentiment this year,” Mr Ho from the Singapore Business Federation said.

Global markets too are unmoved: US stocks hit record high as the ink dried on the phase one deal, but the early gains vanished in the later part of the day as the implications of the trade deal sank in.

In China, little changed for the yuan against the dollar on Thursday, even though the Chinese currency was a key part of the deal, and its CSI 300 stock benchmark fell 0.42 per cent.

Singapore’s Straits Times Index closed about 0.65 per cent higher on Thursday, but other Asian markets moved marginally or edged down over the course of the day.

Mr Capri of NUS Business School said that investor and business confidence levels are much the same as before the deal was signed. “Few businesses are going to say, ‘We are going to start investing again, let us open our cheque books and start doing more because of the phase one deal’. Nobody is saying that.”

Likewise for Singapore, Trade and Industry Minister Chan said.

“From what I know (of how Singapore firms behave), I don't think they look at (how the trade war is progressing) move by move. They look at the trend, and when they look at the trend, they know that there are some fundamental issues between China and the US that remain unresolved and they make... their plans (based) on those long-term forces,” he said.

The phase one deal helps to calm the markets, Mr Chan said, adding that people are slightly relieved. “But I don't think people are overlooking the long-term challenges.”

Related topics

Donald Trump USA China US-China trade tariffs trade deal business Chan Chun Sing

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