The “Trade Deal” is Hilarious

There’s no third party enforcement or oversight of whether the two sides are meeting their obligations. Basically, it’s just political cover. The market doesn’t care. Stocks wanted a resolution and this will do for now.

Here’s Ethan Harris and the BofA Merrill US Economics research team:

The more interesting part of the deal is China’s agreement to dramatically increase imports from the US. China is tasked with increasing agricultural, manufacturing, energy and services by more than 50% this year with another sharp increase in 2021. We remain skeptical that China can hit these targets. The deal claims that the “purchases will be made at market prices based on commercial considerations and that market conditions…may dictate the timing of purchases.” It is hard to reconcile these very aggressive quotas with the idea of buying at market prices.

What happens if China falls short of the targets? The enforcement mechanism allows both sides to judge for themselves whether they are meeting the spirit of the agreement. In the current deal, rather than set up an independent arbiter-like the WTO or a set of impartial judges-each side sets up its own group to monitor implementation. If conflicts are not resolved within 90 days each side has the right to take “proportionate” actions, including abandoning the deal.

Harris concludes that China is almost certainly going to fall short of these targets for purchases of US goods in year one, but that it won’t matter because only the Trump administration would be in a position to publicly pronounce this shortfall, and they’re not going to with an election in front of them. This was about restoring confidence and calming markets with the campaign heading into the final stretch. Getting something written down on paper. Mission accomplished as the S&P 500 cruises toward an opening around 3300 as of this blogging…


The US-China deal: A “big, beautiful monster”?
Bank of America Merrill Lynch – January 16th, 2020

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