Americans won’t get much of a financial reprieve from a limited trade deal signed with China on Wednesday, economists say, because while the truce helps consumers avoid the pain of further tariffs, it doesn’t erase all the earlier ones.
The “Phase One” deal calls off President Trump’s plan to impose levies on roughly $156 billion in Chinese consumer goods including cell phones, laptops and toys. The U.S. also cut the tariff rate in half from 15% to 7.5% on levies it imposed in September on about $120 billion in Chinese products. In return, China committed to buying more U.S. agricultural goods and improve protections for American technology and trade secrets.
“The most important element of this deal is what didn’t happen: further tariffs,” says Gregory Daco, chief U.S. economist at Oxford Economics. “The risk of more tariffs isn’t going to materialize and that’s the biggest gain for Americans.”
Trump’s tariffs on Chinese products were fully passed on to U.S. consumers and corporations in all industries except steel, according to a recent paper by the National Bureau of Economic Research.
Still, consumer spending, which accounts for more than two-thirds of U.S. economic activity, has remained strong. Unemployment has fallen to a half-century low, helping to offset a slowdown in manufacturing during the long-simmering trade dispute.
“Consumers aren’t going to get relief out of this deal but they’ve still been spared,” says John Ham, associate advisor at New England Investment and Retirement Group. “They haven’t felt the same pain that companies and farmers have faced.”
The deal, signed Wednesday at the White House, removes some uncertainties hanging over financial markets. A new batch of tariffs is off the table for now. That means the trade spat between the world’s two biggest economies over the past 18 months could have less of a drag on the global economy, economists say.
The trade rift has shaved off roughly 0.5% of U.S. gross domestic product, according to Goldman Sachs Global Investment Research.
Global growth is forecast to rise 2.5% this year, up 0.1 percentage point from a year ago as trade recovers, according to the World Bank’s latest Global Economic Prospects report.
To be sure, U.S. tariffs remain on about $370 billion of Chinese goods. That could further weigh on costs for American manufacturers that use Chinese components to assemble products, economists caution.
The tariffs in 2018 led to job losses in the manufacturing sector, according to a Federal Reserve report. And there are signs of lingering effects. U.S. factory activity contracted last month to its lowest reading since June 2009, data from the Institute for Supply Management showed.
Ham, of New England Investment and Retirement Group, doesn’t expect an immediate rebound in manufacturing after the “Phase 1” deal, but at least some of the pain will stop. “Even a partial rollback in tariffs could help earnings this year,” he says.
There are other issues that still need to be addressed and it could take years before a “Phase 2” and “Phase 3” trade accord is met between the Washington and Beijing, experts say. Officials still have to hammer out details on enforcing the protection of intellectual property rights.
China also has a history of making deals and failing to follow through, and this time may not be any different, experts say.
“There’s still a lot of ground to cover,” says Lindsey Piegza, chief economist at Stifel.
With volatility expected to pick up on further trade talks, investors should consider rebalancing their portfolios after last year’s strong stock market gains, some financial planners say.
“Investors should take a long look at how much their stocks have appreciated over the past year to see whether that risk is still worth taking,” says Steve Frazier, president at Frazier Investment Management.
The Dow Jones industrial average jumped 150 points on Wednesday after the trade deal was announced.
Major averages have risen on hopes that a rollback in tariffs could help boost corporate profits and business investment. But stocks briefly eased from records this week on concerns that some aspects of the trade deal were less than what Wall Street was anticipating.
Investors were rattled Tuesday after a Bloomberg report suggested that U.S. tariffs could remain in place until after the U.S. presidential election. Then Trump said Wednesday that the U.S. will maintain tariffs on Chinese goods until a “Phase 2” deal is reached.
Beyond China, the U.S. economy faces more challenges on trade that could make goods more expensive for Americans, slowing the economy’s growth.
Washington could slap duties on $60 billion worth of annual European car and auto-parts exports. The U.S. has also threatened to impose tariffs on $2.4 billion of French goods in a dispute over the country’s planned digital services tax.
Still, an accord with China bodes well for trade negotiations with other countries, analysts and economists say.
“Is it the deal the U.S. wanted with China? No. But it’s a relief for the markets,” says Peter Cardillo, chief market economist at Spartan Capital Securities. “If we were able to crack China, then it will be a heck of a lot easier to deal with Europe.”