Phase One Trade Deal Disappoints Investors

It’s official:

We have a trade deal.

“Phase one” of the presumably multi-phase negotiation has been completed according to both Chinese officials and President Trump. Yesterday, a report from the Wall Street Journal suggested that the deal would cancel new tariffs and roll back existing ones.

Before the market opened this morning, Trump tweeted that the report was incorrect, causing equities to drop in pre-market trading.

“The Wall Street Journal story on the China Deal is completely wrong, especially their statement on Tariffs,” he said via Twitter.

Investors, fearing the worst, prepared for a “no-deal” scenario.

Then, at 10:00 A.M. (11 P.M. local time), Chinese officials announced that a deal had been secured. Moreover, that the new December 15th tariffs would be canceled along with a reduction in existing tariffs.

The market surged in response.

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Then, Trump once again took to Twitter, clarifying the agreement’s details.

“We have agreed to a very large Phase One Deal with China. They have agreed to many structural changes and massive purchases of Agricultural Product, Energy, and Manufactured Goods, plus much more. The 25% Tariffs will remain as is, with 7 1/2% put on much of the remainder. The Penalty Tariffs set for December 15th will not be charged because of the fact that we made the deal,” he tweeted.

Shortly thereafter, U.S. Trade Representative Robert Lighthizer released comments on the deal as well.

“President Trump has focused on concluding a Phase One agreement that achieves meaningful, fully-enforceable structural changes and begins rebalancing the U.S.-China trade relationship. This unprecedented agreement accomplishes those very significant goals and would not have been possible without the President’s strong leadership,” he said in a press release.

And even though both sides of the table have been surprisingly candid with their remarks, investors still don’t know what to make of it.

As of midday, the S&P and Dow are both down – a surprising reaction to one of the year’s most anticipated events.

The specific trade reforms, which remain a mystery, are what investors are most interested in. Chinese officials said that a longer-term deal is still developing, which would include changes to technology transfer, agricultural purchases, and, most importantly, the handling of intellectual property (IP).

IP theft was what started the trade war in the first place. Any corporations that did business in China were raided by Beijing, and as a result, had their “trade secrets” copied by the Chinese government.

It’s a practice that gave China an unfair advantage and contributed to much of the country’s meteoric growth over the last decade.

And if the phase one trade deal doesn’t force China to change its tune, the market could end up dropping further, even though we narrowly avoided another round of tariffs.

If there is a silver lining to be had, though, it’s that Trump appears ready to move forward with the next round of negotiations.

“We will begin negotiations on the Phase Two Deal immediately, rather than waiting until after the 2020 Election,” he tweeted.

Thus far, the president’s optimism hasn’t carried over into equities. If anything, today’s trade deal announcement proves that, for the most part, investors don’t care about tariffs.

The real issue is trade reform, and unless the U.S. can permanently alter China’s way of doing business, we’ll continue to see muted trade war reactions from the market.

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