World’s two largest economies – the United States and China – offered relief to global trade and helped ease simmering geopolitical tensions by signing the agreement yesterday which is a significant positive milestone that marks the end of the first phase of the trade war.
The deal between Washington and Beijing has come at the right time as it not only removes a significant geopolitical overhang and remediates the threat of additional escalation but also provides much-needed thrust to the global economy.
Although the US tariffs are in place for some time there is an agreement between both the country to address key issues that will drive away uncertainties that are currently present.
Looking at the deal, it commits China to substantially increase its imports of US goods over the course of 2 years, around $200 billion or +81% y/y in 2021 in exchange for the US to halt future tariff increases.
China is unlikely to ramp up its purchases as promised, however, the sheer size of the commitment should satisfy the US over the next few months as long as several large orders are initially placed.
The deal also includes promises by China on intellectual property protection, China market access, and technology transfer, currency exchange rates and the opening of the financial services industry.
Separately, there is no timetable for further negotiations on structural issues – such as industrial policy, intellectual property and government subsidies and I think the odds of any future agreements are slim to none.
The deal concludes more than a year of tough negotiations including several months of suspension of talks between the two largest economies of the world.
For, India the deal offers little benefits.
Companies having operations in China, namely Tata Motors, M&M, etc are set to gain.
Metal companies will also benefit as the deal will enable Chinese metal companies to resume operations at a full scale.
A positive sentiment should bring back cheers to the markets.
More importantly, the metals sector could see a significant rerating over the next 12 to 15 months as a lot of uncertainty which was prevailing till now gets cleared. This was also expected from a long time ahead of the elections in the US in Nov 2020
While in the short term metals stocks have seen some selling pressure we believe this was on expected lines as markets had discounted us China trade deal earlier. But the long term ramifications of this deal are considered quite positive as globally metals could see a sustained price rally after a long time which will get reflected in financial numbers possibly from FY21 onwards.
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