US markets rise on trade war deal, but broader issues remain

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US stock markets jumped on Wednesday as the United States and China signed their “phase one” trade deal.

Buoyed by the deal signing, the Dow Jones Industrial Average rose as much as 206 points, or 0.71 per cent, in the early trading session in New York ahead of the midday signing of the incremental trade deal by US President Donald Trump and Chinese Vice-Premier Liu He in Washington.

The index has risen 14 per cent since the end of August, when the two countries announced trade negotiations had resumed after a summer hiatus.

Wednesday’s signing in the East Room of the White House marked a long-expected truce of a drawn-out trade war between the two countries that has gone on for 18 months. Included in the deal is a commitment from Beijing to buy roughly US$200 billion of American goods and services over two years.

“Wall Street loves this deal as it is,” Trump said at the signing.

Trump’s China-hawk trade adviser Peter Navarro, painted a much bleaker view, however. Earlier this week, Navarro said that China has committed “seven deadly sins”: cyberattacks; intellectual property theft; forced technology transfers; steel dumping; unfair competition by state-owned enterprises; currency manipulation and allowing fentanyl shipments that helped fuel the US opioid crisis.

“With this phase one, we are not halfway there to resolve all the issues with China, not even a quarter,” said Patrick Chovanec, chief strategist at Silvercrest Asset Management.

“We see a lot of enthusiasm in the markets. People think all of a sudden we are going to go into the new year and trade uncertainties are going to disappear,” he said. “But it’s really immature.”

Most of the tariffs the two nations have applied to each other’s products remain in place. While the deal preserves the majority of duties the US has slapped on $360 billion worth of Chinese goods, it suspends tariffs on about US$162 billion in Chinese goods threatened for December and halves an existing 15 per cent duty on imports worth another US$110 billion.

China will not be lifting any of the retaliatory tariffs it has imposed on US$110 billion worth of American goods as part of the deal.

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US President Donald Trump speaking next to Chinese Vice-Premier Liu He before signing a “phase one” trade deal at the White House on Wednesday. Photo: Abaca Press via TNS alt=US President Donald Trump speaking next to Chinese Vice-Premier Liu He before signing a “phase one” trade deal at the White House on Wednesday. Photo: Abaca Press via TNS

Moreover, beyond tariffs, numerous other issues continue to plague the US-China relationship, Chovanec said.

For one, Huawei Technologies, the Chinese telecommunications giant that is the focus of concerted attacks and restrictions by Washington, will remain a contentious issue as the war to dominate global 5G telecoms networks continues to heat up.

US Treasury Secretary Steven Mnuchin told CNBC on Wednesday that Huawei’s access to US markets will be dealt with as a security threat, apart from the trade disputes.

“Our national security issues are our primary concern,” Mnuchin said. “So when it comes to our government networks, when it comes to sophisticated business networks, military networks, and networks of all of our allies we want to make sure those networks are fully secure.”

The Trump administration has put Huawei on an “entity list” since May to restrict its business in the US, fearing that the company is obliged to hand over sensitive information transmitted over its systems to the Chinese government.

And politically, Chovanec said, further economic decoupling between China and the US ” a course advocated by China hawks in Washington ” would not be stopped because of the deal.

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US Treasury Secretary Steven Mnuchin outside the White House ahead of the deal’s signing on Wednesday. Photo: EPA-EFE alt=US Treasury Secretary Steven Mnuchin outside the White House ahead of the deal’s signing on Wednesday. Photo: EPA-EFE

Heading into this presidential election year, the question remains whether there will be an incentive to beat up China to stir Trump’s base.

Investments including mergers as well as early-stage venture deals between the two countries are not expected to pick back up either.

“Deals have dried up because the [geopolitical] uncertainty has been so high,” Chovanec said. “After the phase one, uncertainty remains high and US regulators are getting tougher on Chinese investments.”

After stocks’ initial leap, US exchanges seemed to step back a bit as further assessments were made. By midafternoon, the Dow was still up, but only by about a half per cent, while the Nasdaq and the S&P 500 indexes both scraped into slightly negative territory.

“Markets hate tariffs, markets love any moves towards de-escalation,” said Euan Rellie, founder of BDA Partners, an Asia-focused investment bank based in New York.

“But it’s not good news for the markets that most of the tariffs are still in place for a year.

“We have a problem, particularly about Chinese tech. On the one hand, we ask the Chinese to buy more products, on the other hand, we are terrified China will use the technology against us.”

Rellie continued: “I expect to see some pockets of increased deal activities in health care, biotech, consumer, particularly in the financial services industry. But I am not expecting much of an overall uptick in mergers and acquisitions between the two countries. Capital flows will remain very low.”

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This article originally appeared in the South China Morning Post (SCMP), the most authoritative voice reporting on China and Asia for more than a century. For more SCMP stories, please explore the SCMP app or visit the SCMP’s Facebook and Twitter pages. Copyright © 2020 South China Morning Post Publishers Ltd. All rights reserved.

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