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Economic Update

2020/01/22

Phase One Deal: Truce in the Sino-US Trade War

Under the so-called “phase one” trade deal between Mainland China and the United States, China has pledged to increase imports from the U.S. by at least US$200 billion above 2017 levels over the next two years, and enhance intellectual property protection.

The deal covers intellectual property, technology transfer, trade in food and agricultural products, financial services, macroeconomic policies and the exchange rate, expanding trade, and bilateral evaluation and dispute resolution.

Specifically, China will increase its purchases from the U.S. this year -- of manufactured goods by no less than US$32.9 billion, of agricultural goods by no less than US$12.5 billion, and of services by no less than US$12.8 billion. These would represent a significant increase in China’s imports from the U.S., given that the baseline levels in 2017 were about US$130 billion for goods and US$58 billion for services.

For its part, the U.S. has agreed to halve existing tariffs on about US$120 billion of Chinese goods, from 15% to 7.5%, and will not proceed with tariffs on US$160 billion worth of Chinese goods that were originally due to take effect on 15 December 2019. However, a 25% additional tariff on US$250 billion of other Chinese goods will remain in place. President Donald Trump said a removal of these tariffs would only happen in the “phase two” deal.

While the truce has led to a pause in trade tensions between the world’s two largest economies, relations are likely to continue to be bumpy. Issues such as industrial subsidies and cyber intrusions are still to be addressed during negotiations for the “phase two” deal.

As such, it is perhaps premature to cheer too loudly for the deal, especially when Hong Kong could be a loser under the terms. According to Bloomberg, some shipments currently transported from the U.S. to Mainland China via Hong Kong may in the future be re-routed directly to Mainland ports, as a means to narrow China’s trade surplus with the U.S.

In general, Hong Kong should benefit from an improving external trade environment. However, if shipments do start bypassing the city, it may mean a completely new ball game for Hong Kong.

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