Via Financial Times

The US and China are set to sign a hard-fought agreement to halt their trade war, ushering in a fragile truce and a testy period of reconciliation between the world’s two largest economies after months of confrontation that cast a cloud over global growth. 

The “phase one” deal, to be formalised on Wednesday at a White House ceremony scheduled for 11.30am, is the result of a limited compromise between Washington and Beijing at a time when both countries feared the economic and financial fallout from escalating tensions. 

It commits China to making $200bn in additional purchases of US goods, including farm products, and other pledges on currency and intellectual property, in exchange for a small rollback in some tariffs and an indefinite hold on further punitive measures out of Washington. 

The agreement, however, falls far short of a lasting peace to end a trade war that has lasted nearly two years, bruising trust in both countries and disrupting businesses on both sides of the Pacific. It leaves in place the vast bulk of tariffs imposed on $360bn of Chinese products by President Donald Trump — and yields few Chinese concessions on key aspects of its economic model that have most frustrated the US, from the use of subsidies to rampant cybertheft.

It is also unlikely to halt the deeper strategic rivalry between the two powers, which has accelerated during Mr Trump’s presidency on military matters and primacy in advanced technologies from 5G communications to artificial intelligence. 

“The signing of this truce, while welcome, does not obviate the reality that both countries view one another in increasingly antagonistic terms,” said Ali Wyne, a policy analyst at the Rand Corporation, a think-tank in Washington. “Washington regards Beijing’s economic ascendance as a threat to its national security and that of its allies and partners; Beijing, meanwhile, considers the acceleration of indigenous innovation and the cultivation of alternative export markets to be existential imperatives.”

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The agreement will offer some respite to investors in financial markets, which have see-sawed, at times dramatically, as the negotiations between the two capitals have unfolded. However, US and Chinese officials have offered few clear indications on the timing and prospects for a second phase of negotiations, which could bring about some greater certainty for businesses with supply chains, production and consumers in both countries.

Beijing has been looking for a more rapid phase-out of levies after Wednesday’s deal, but the US has resisted, in a bid to ensure that China respects its commitments. Mr Trump has suggested there could be no agreement on the second tranche of talks until after the 2020 November presidential election.

“From a market perspective [the deal] removes some important clouds, but from a deeper macroeconomic perspective I would be doubtful this is enough for firms to restart investment, to reopen their wallet and start spending. They will wait for something more definitive,” said Nathan Sheets, chief economist at New Jersey-based PGIM Fixed Income. 

The deal has already been touted by Mr Trump as a political victory, having promised to take a tough line on China throughout his presidency and during the 2016 campaign. But it is unclear whether the bet will pay off during his campaign for a second term.

Mr Trump has exposed himself to criticism that the trade war was economically reckless, inflicting some damage on states reliant on farming and manufacturing even if it did not lead to a full-blown recession. Democratic critics are likely to stress that all of Mr Trump’s bluster yielded few big Chinese concessions.

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“President Trump is taking the easy way out,” said Charles Schumer, the top Democrat in the Senate. “He’s settling for a weak, temporary deal that will cost American businesses, American farmers, and American workers for years to come.”

The run-up to the agreement was preceded by a significant goodwill gesture on the US side. The Treasury department dropped its designation of China as a currency manipulator, which it had implemented as tensions flared last August, in an announcement that came just as Liu He, China’s vice-premier, landed in Washington.

Stephanie Segal, a senior fellow in political economy at the Center for Strategic and International Studies, said the US had also adopted a de-escalatory posture. “The Chinese have been seeking to reopen the lines of communication across all levels of government — engagement is a key watchword,” she said. 

Even Robert Lighthizer, the hard-nosed, hawkish US trade representative, said in a Fox Business Network Interview that he was not trying to decouple the economies but write “rules” that worked for both.

“People can chirp. It doesn’t bother me at all,” Mr Lighthizer said. “I think that the president has got a vision. He’s got us working hard on it and we have a huge step forward.”