The U.S. and China reportedely reached a trade deal agreement. However, there are good reasons why the deal may fall thorough yet again.
The U.S. and China have reportedly reached an agreement in principle on “phase one” of trade deal… for real this time.
According to “sources,” President Trump has signed off on the trade deal that includes stopping additional tariffs on roughly $160 billion worth of Chinese consumer goods. In exchange, the Chinese have promised to buy $50 billion in U.S. agricultural products.
But this trade deal agreement, like countless other before it, is likely to fall through. Here are five reasons why.
The old Wall Street adage goes ‘buy the rumor, sell the news.’ The Trump administration has utilized this saying to conveniently pump the stock market higher by incessantly giving the trade deal rumor, but never delivering the news.
Earlier in October, an eerily similar trade deal was reportedly agreed upon by the U.S. and China. The trade-offs and the conditions were similar, but the deal eventually fell through. The rumor, however, served the purpose of pumping the stock market higher.
As per the reports, both countries have reached an agreement ‘in principle.’ That means no papers have been signed yet and both countries can back out at any time.
Without an official agreement, this trade deal rumor should be treated as the hundreds of similar rumors that came before it. And it looks like there won’t be any official agreement this time either.
The reluctance of the Chinese to disclose the terms of the deal means either it will fall through or it won’t be substantial enough to justify the massive surge in stocks.
China is more desperate for a trade agreement than the U.S. Given the recent fragility of the Chinese banking sector and the fact that a lot of Chinese real estate companies have dollar-denominated debt, Beijing needs an agreement on trade really badly.
If yesterday’s rumors were indeed true, you’d have seen the Chinese media lauding it. But none of the Chinese media or economic agencies involved in trade negotiations have offered any sort of confirmation on the trade deal. China’s muted reaction suggests there’s still a good chance of the deal falling through.
Speaking at an annual symposium in Beijing, Chinese state counselor and foreign minister Wang Yi said the U.S. has successively angered and suppressed China. Here’s what Wang said:
Such behavior is almost paranoid, and is indeed rare in international exchanges, seriously damaging the hard-won foundation of mutual trust between China and the United States, and seriously weakening the United States’ international credibility.
It’s highly unlikely that a top level Chinese official would be making such a harsh statement just hours before the reported agreement was reached.
The rumored trade deal agreement hinges on China buying $50 billion worth of agricultural products from the U.S. However, as pointed out by Twitter user @kannbwx, the number is likely to be too exorbitant for China since the highest they’ve ever spent in a year was $26 billion.
The concerns were corroborated by CNBC, which reported that China is still unsure about the $50 billion target. If China can’t hold up its end of the bargain, the U.S. will be forced to walk away from the deal.
The rumored trade agreement served its purpose of pumping the stock market. Taking all things into consideration, this agreement is as likely to go up in smoke like the many before it.
Last modified: September 23, 2020 1:23 PM