Later today (US time) it is expected that the US and China will sign a phase one trade deal.

Investors may take some comfort in the progress being made, having sent market indices down when the war was at its peak in late 2018 and giving it a leg up when any signs of a resolution or thawing of tensions are apparent.

Sectors heavily impacted, such as the semiconductor industry, will likely be relieved as well. With the US being the world’s largest chip maker and China being the world’s largest importer (most notably phone makers Huawei and Xiaomi) the sector was caught right in the middle of it.

But despite the emergence of a phase one trade deal, economists are warning investors not to take their eyes off the situation.


It won’t solve underlying issues

Bloomberg economist Tom Orlik warned the deeper issues that motivated the trade war would remain. However, he believes fears about China overtaking the US remained overblown.

“China’s current GDP per capita – scarcely a third of the level in the US – suggests they are a long way from the technology frontier,” he said.

“We’ve already seen China make progress in some of these areas [US demands].

“The financial market is opening, foreign auto makers face fewer constraints, protections for IP are being modestly strengthened, the exchange rate is more market based and the People’s Bank of China has steered clear of competitive devaluation.

“We expect the 86-page document will recycle some of these policies and set out incremental progress on a few more. We don’t expect that to add up to anything like fundamental reform.”

In a similar fashion, Scotiabank chief economist Jean-Francois Perrault said the dream and reality might differ. He said the nirvana of a global trade boost was “hopelessly optimistic”.

“Trade-related uncertainty will remain elevated so long as President Trump is in office,” he said.

“His mission to shrink the trade deficit is far from accomplished, and we expect continued drama on the trade front.

“We take comfort in the détente between China and the US on the trade front, but this development has no tangible impact on our view, other than reducing a major tail risk.”

Both Perrault and Orlik also noted China was not the only country at the risk of US tariffs.


Temporary calm

Nevertheless, the deal will ensure additional tariffs do not come into place, at least for now.

CommSec chief economist Michael Blythe said it also meant the US and China would likely start working on a so-called phase two deal and a US recession was less likely because of increased consumer spending.

On top of this is the US Presidential election in November, where trade will be a key issue, according to Blythe.

“Delivering a fully formed trade deal could be a political triumph,” he said.

“Equally, US perceptions about the trading relationship with China are much more negative than for other countries the US has negotiated with.

“There may be political points in playing hardball and dragging out the negotiations.”

Blythe also warned that even if China began buying more from the US, it wouldn’t necessarily be a good thing. Inevitably this would involve scaling back purchases from elsewhere including Australia. He specifically pointed to LNG, beef and wine as industries that could be potentially impacted.