A so-called Phase 1 trade deal between the U.S. and China ensures the dispute between the two countries won't escalate — at least for now.
While the agreement addresses some of their outstanding issues — specifically China agreeing to buy more American agricultural products — what's perhaps even more significant are the thorny issues that remain unresolved.
Stock markets have jumped every time such progress has been rumoured — and it's been rumoured off and on for months now.
"It never ceases to amaze me how investors can continue to react to the same piece of news," David Rosenberg, chief economist at Gluskin Sheff wealth management in Toronto, said in a note to clients.
Many of the details of the partial deal haven't been released, but here's a look at what we know so far.
What is in the deal
The global economy has been held back as the dispute between the U.S. and China has ebbed and flowed since 2018. Any step away from the brink is good for everyone.
Many were worried about the impact of the next round of tariffs, which would have hit American consumers just ahead of Christmas.
The now-cancelled tariffs would have targeted Chinese-made goods including smartphones, clothing and toys.
The U.S.-China deal reduces some tariffs on goods. In exchange, China has agreed to buy more U.S. agricultural products. (Mario Tama/Getty Images)
Sal Guatieri, senior economist at BMO, says the partial deal means those new tariffs are off the table.
But more surprising, he says, the agreement will cut existing tariffs on $360 billion in Chinese imports. It will roll back the tariff rate imposed in September on items ranging from televisions to bed linens.
"The rollbacks, if realized, could revive business sentiment and add a couple of tenths to U.S. GDP growth next year," Guatieri said in a note to clients. "At the very least, the de-escalation in trade tensions, if sustained, would shift the economic risks to the upside."
In return for the elimination of tariffs, China has promised to buy large quantities of U.S. soybeans, poultry and other agricultural products.
A round of now-cancelled tariffs were set to kick in this weekend and would have hit U.S. shoppers right before Christmas. (Katherine Holland/CBC)
U.S. President Donald Trump says the Chinese have agreed to buy $50 billion worth.
"And I say, affectionately, the farmers are going to have to go out and buy much larger tractors, because it means a lot of business, a tremendous amount of business," Trump told reporters.
What's not in the deal
Markets went up Friday on the news of the agreement. But they did the same thing last week and last month when negotiators said a deal was coming.
Rosenberg isn't sure investors fully understand just how limited this agreement is.
The core of the U.S.-China dispute is over what the Americans consider unfair subsidies for Chinese industries and the need for stiffer protections for intellectual property and against currency manipulation.
The Phase 1 deal addresses none of those issues.
In a note to clients, Rosenberg says Phase 1 deals with a "tiny portion of issues," while the much more important ones, such as subsidies and technology transfers, "have been left for another date."
That skepticism didn't keep Trump from hailing the agreement as a "phenomenal deal."
"This is a very large deal," he told reporters at the White House. "The China deal. It covers tremendous manufacturing, farming, a lot of rules, regulations, a lot of things are covered. It's a Phase 1 deal, but a lot of big things are covered."
But even Trump admits some of the biggest blocks of tariffs remain in place.
"The tariffs will largely remain at 25 per cent on $250 billion," he said. "And we'll use them for future negotiations on the Phase 2 deal, because China would like to see the tariffs off."
The upside for global trade tensions
The partial deal is Trump's second trade victory of the week. On Tuesday, Canadian, American and Mexican negotiators finally agreed to a revised deal to replace NAFTA.
And in the U.K. election this week, the Conservatives secured a majority government, which should dramatically reduce the chances of a no-deal Brexit.
The possibility of Britain leaving the E.U. without a formal divorce agreement has raised serious concerns and uncertainty about how trade might be affected in Europe.
No one knows exactly how the U.K.'s departure from the EU will proceed, but with the election result, at least some of the uncertainty seems to have been removed.
For the first time in a long time, the news about global trade isn't a total disaster. And that has some analysts optimistic heading into 2020.
While she shares many of the concerns about the bigger issues between the U.S. and China that need addressing, Frances Donald, chief economist at Manulife Asset Management in Toronto, says the Phase 1 deal shows that both sides are willing to make a deal and get this dispute behind them.
"Canadians can breathe a sigh of relief," Donald said. "Global growth looks as though it now has upside potential and the worst geopolitical tensions are behind us."
And that, she says, is good news for everyone.
"It not only helps our trade sector and our manufacturing sector, but it will support markets that will translate into better equity returns for Canadians as well."
US claims that China will purchase $40bn of American agricultural goods were greeted with scepticism over the feasibility of a deal that would surpass all previous shipments by at least $10bn.
US officials said Beijing had committed to the imports as part of a preliminary trade agreement reached Friday that followed months of negotiations and escalating tariffs between the two trading partners.
If realised, the pledge could prop up rural economies suffering from a glut of grain. The agreement “provides relief after more than a year of market uncertainty,” said Jim Sutter, chief executive of the US Soybean Export Council.
There were questions about the practicality of the agreement, however. Joseph Glauber, a former chief economist at the US Department of Agriculture, said silence on China’s commitments by individual commodity could prove confusing to farmers deciding what to plant. “The details still remain very obscure,” he said.
Annual US farm exports to China had exceeded $20bn until 2018, when they dropped to $13.4bn mainly because of retaliatory duties on soyabeans and pork.
Robert Lighthizer, US trade representative, said China had agreed to increase agricultural purchases by $16bn per year above the $24bn in sales recorded in 2017, bringing the annual total to at least $40bn in 2020 and 2021. The purchases would be part of a broader commitment to import more US manufactured goods, energy commodities and services.
Ning Jizhe, vice-head of China’s state planner, the National Development and Reform Commission, confirmed the country would increase purchases of US agricultural products “that are competitive in the market,” though he said specific numbers would be released at a later date.
Agricultural markets had a mixed reaction to the news, with soyabean futures closing up 1 per cent at $9.075 a bushel and lean hogs ending 1.2 per cent higher in Chicago, while cotton — an important export to China — fell 0.6 per cent to 66.8 cents a pound.
Reaching $40bn in sales could prove a challenge in current market conditions. When the US exported a record $29.6bn in agricultural goods to China in 2013, the soyabean price was more than $14 a bushel. When prices are lower, volumes need to be higher to boost overall sales.
“To get to $40bn seems like a pretty big number unless we have a major change in commodity prices between now and 2021,” said Stephen Nicholson, vice-president of grains and oilseeds at Rabobank in St Louis.
Soyabeans were historically the largest US agricultural export to China, totalling about 32m tonnes in 2017. If China were to increase purchases by two-thirds as implied by the proposed agreement, volumes could rise to about 53m tonnes.
This year’s US soyabean crop was 97m tonnes, of which 61m tonnes will be used by the domestic oilseed crushing industry, the USDA forecast this week.
Extra shipments to China could crowd out export customers in Europe and the rest of the world, forcing them to turn to Brazil for supplies in a mirror image of trade flows that occurred during the tariff war, said Richard Feltes, vice-president at RJ O’Brien, a commodities broker.
Mr Glauber said China’s commitments could draw scrutiny from other food exporting countries that may question “whether US products have been guaranteed preferential access” for tariff-rate quotas that are supposed to be applied on a most-favoured nation basis under global trade rules.
China’s demand for soyabeans has declined by millions of tonnes as African swine fever wipes out more than half of its pig herd, the main consumer of soya meal. Its meat imports have correspondingly soared, notably from Australia, Brazil and Europe, as tariffs have made US exports uncompetitive.
In November, China ended a ban on US poultry imposed in 2015 in response to an avian influenza outbreak. Its 35 per cent tariff could disappear under the new pact.
Jim Sumner, president of the USA Poultry and Egg Export Council, said Friday’s deal opened an opportunity for $2bn in annual poultry exports to China. “We hope to have a good share of that $40bn,” he said.
US pork exports to China were $1bn in 2017, according to the US Meat Export Federation. An 2018 analysis by Iowa State University published before the swine fever outbreak concluded that China could import $8.9bn more US pork once tariffs were gone.
Gary Blumenthal, president of the consultancy World Perspectives, warned that increasing exports that much risked a squeeze on US supplies. “I don't know how you move that much pork in one year without it showing up in your bacon prices,” he said.