Investors in Asia have sold on the news on Wednesday. Stocks slipped for a second day in China despite the scheduled dipping of the inkwell today for the "Phase One" Sino-American trade deal.
Remarkably, we still don't know the precise details of the deal, suggesting it has been revised right up to the signing. The Chinese team says the two sides agreed on the text on Monday. But the 86-page document was still being translated into Chinese late on Tuesday, according to Reuters.
That suggests the deal has actually been struck on the fly since it was supposedly agreed to in October. Let's hope we don't have a repeat of the fiasco last spring, when a "finalized" deal fell apart at the last minute.
The document is due to be revealed on Wednesday. But the list of specific goods that China is committing to buy will reportedly remain hidden in a non-public annex to the deal.
On Wednesday, Chinese shares, in the form of the CSI 300 index, closed down 0.5%, with Japan's broad Topix index down 0.5%. Hong Kong's Hang Seng index was off 0.4%.
President Donald Trump was keen to lure Chinese counterpart Xi Jinping to Washington for an image-boosting photo shoot signing to honor the occasion. But he will have to settle for China's chief trade negotiator, Vice Premier Liu He, joining 200 guests from the commercial sector and government for the 11:30 a.m. signing.
Trump is trumpeting the deal, which he has called a "beautiful, big monster." Last February, however, he demonstrated misplaced optimism that the two sides were about to strike "the largest trade deal ever made, by far."
In the spring, 11 rounds of trade talks culminated in a 150-page trade-deal document that He took back to Beijing. But Xi himself apparently vetoed the text and the vast majority of Chinese concessions. Those would have called on Beijing to overhaul its bloated state sector, a jobs-cutting move that the Chinese leadership resisted at a time of slowing growth.
This pared-down Phase One finds its greatest importance not in the details but in the deescalation by both sides after last spring's failure. The trade war was back on in full effect as of last May, and has knocked business confidence on both sides of the Pacific.
With Phase One pending, China in December rolled back its own implementation of added 5% to 10% tariffs on U.S. goods. The United States also put off the imposition of an extra 15% in import taxes on US$160 billion in consumer goods such as game consoles, phones, toys and computers, and halved existing 15% tariffs on another US$120 billion in Chinese goods.
The headline figure for Phase One is that China is agreeing to buy US$200 billion in U.S. goods over next two years. That apparently involves: US$80 billion in manufactured goods, particularly big-ticket items such as aircraft and autos; US$50 billion in energy; US$35 billion in services; and US$32 billion in agricultural products.
We've often heard that China will be buying US$40 billion to US$50 billion in farm goods. But the top-line figure includes the existing US$24 billion in annual agricultural shipments into China, so there's only US$16 billion in additional annual ag-goods spending, mainly soybeans, wheat and corn.
There are reservations as to whether China can live up to its side of the deal, which would require U.S. imports into China to double. In 2017, the full year off which the increases are being calculated, China imported US$186 billion in U.S. goods and services.
The two-day selloff of China-related stocks stems from U.S. comments suggesting there may be no further trade concessions leading into U.S. presidential elections in November. Existing 25% tariffs on US$250 billion in Chinese goods remain in place.
There's real pain as a result. So far, U.S. companies have paid US$46 billion in extra import taxes since February 2018, according to calculations by the consulting group Trade Partnership Worldwide of U.S. Commerce Department data, and 81% of that coming on goods from China. Exports of U.S. goods targeted by tariffs from U.S. trade partners have fallen 23%.
U.S. Treasury Secretary Steve Mnuchin, the good cop on China trade to Trump's bad, says the existing tariffs could be revisited before the November U.S. elections if the two sides quickly move on to the next phase of their trade settlement.
A Phase Two deal would require structural changes in the Chinese economy. This first agreement is an old-fashioned one, basically a deal that could have been struck in the late 19th century, manufactured goods with a rider about services slipped on.
Phase Two would have to tackle tough issues such as intellectual property in China, where theft of ideas is rampant. There's also been no attempt yet to address China's government subsidies to its state-owned enterprises.
China is hardly alone in supporting its favorite industries - the U.S. farm sector that will be selling into China receives around US$20 billion annually from the federal government. But Chinese subsidies are even heftier and more widespread. They allow the production of cut-price steel, for instance, that U.S. producers claim is "dumped" on the global market in a way that makes it impossible to compete.
China would actually like to reform its state-owned enterprises, where the focus has historically been on providing jobs and maximizing capacity over profits. But the slowdown in its economy, concerns over credit that have seen the failure of three small banks, and worries about trade have pushed off those reform ambitions.
So we're left on Wednesday with a deal that looks good on paper, sounds good in headlines, and may be hard to execute and enforce. As tensions with the United States peaked, China lined up deals to buy more soybeans, for instance, from Argentina and Brazil.
The United States would be able to reinstate tariffs if it believes China is not following through on its promises. But we'd be back in a position where China would retaliate, and consumers in both the United States and China end up paying the price.