Khan Capital | December 2019
Key Takeaways
- The US and China announced a “Phase 1” trade deal on 13 December 2019, averting the planned 15 December tariff escalation and reducing the 1 September tariffs on $120 billion of Chinese goods from 15% to 7.5%, while leaving the 25% tariffs on $250 billion of goods untouched, a partial de-escalation that markets welcomed but that left the structural conflict unresolved.
- China committed to purchasing an additional $200 billion in US goods and services over two years across agriculture, energy, manufactured goods, and services, targets that many trade economists considered unrealistic given pre-trade-war baselines and that would ultimately go unfulfilled.
- The deal included intellectual property protections, currency manipulation provisions, and a dispute resolution mechanism, but deliberately excluded the most contentious structural issues: forced technology transfer, state subsidies to Chinese industry, and cybersecurity, deferring them to a “Phase 2” that would never materialise.
- Markets rallied to new all-time highs, with the S&P 500 gaining 1.7% in the week following the announcement and global trade-sensitive sectors outperforming, but the US-China Phase 1 trade deal was more ceasefire than resolution, and the structural decoupling of the world’s two largest economies continued beneath the surface.
The US-China Phase 1 Trade Deal: A Ceasefire, Not a Peace Treaty
After 20 months of escalating tariffs, retaliatory measures, and market-rattling rhetoric, the United States and China reached a tentative truce. The Phase 1 trade deal, announced on 13 December 2019 and formally signed on 15 January 2020 at the White House, represented the most significant de-escalation in a trade conflict that had defined global markets since early 2018. The S&P 500 surged to fresh all-time highs. The yuan strengthened. Copper and soybeans rallied. For a market that had spent nearly two years pricing trade war risk, the relief was palpable.
But beneath the headlines, the deal’s limitations were glaring. The 25% tariffs on $250 billion of Chinese goods, imposed in 2018 and early 2019, remained fully in place. The structural issues at the heart of the trade conflict, the ones that had triggered the confrontation in the first place, were conspicuously absent from the agreement. The US-China Phase 1 trade deal was, at best, a managed pause in a conflict whose fundamental drivers, technological competition, geopolitical rivalry, and incompatible economic models, remained unresolved.
What the Deal Contained
The agreement spanned eight chapters covering intellectual property, technology transfer, agriculture, financial services, currency, and trade expansion. The centrepiece was China’s commitment to purchase an additional $200 billion in US goods and services above 2017 baseline levels over the two-year period of 2020 and 2021, distributed across four categories.
| Category | 2020 Target (above 2017) | 2021 Target (above 2017) | Key Products |
|---|---|---|---|
| Manufactured Goods | +$32.9bn | +$44.8bn | Aircraft, autos, machinery, semiconductors |
| Agriculture | +$12.5bn | +$19.5bn | Soybeans, pork, cotton, wheat |
| Energy | +$18.5bn | +$33.9bn | LNG, crude oil, coal, petrochemicals |
| Services | +$12.8bn | +$25.1bn | Financial services, cloud computing, travel |
The intellectual property chapter included provisions on trade secret protection, pharmaceutical-related IP, and enforcement mechanisms. China agreed to address long-standing US complaints about the forced disclosure of trade secrets as a condition for market access. The currency chapter established commitments on exchange rate transparency and prohibited competitive devaluation, though China had already largely abandoned the currency manipulation that characterised earlier periods. The financial services chapter committed China to accelerating the opening of its banking, insurance, securities, and credit rating markets to US firms.
What the Deal Did Not Contain
The absences were more significant than the contents. The Phase 1 deal did not address state subsidies to Chinese industry, the core complaint of the US business community and the structural issue that had originally motivated the Section 301 investigation. China’s “Made in China 2025” industrial policy, which targets dominance in ten strategic technology sectors through subsidies, forced technology partnerships, and state-directed capital allocation, was not mentioned. The entity list restrictions on Huawei and other Chinese technology companies remained in place. The fundamental question of whether China’s state-capitalist model was compatible with the rules-based trading system was deferred entirely.
The deal also did not address cybersecurity, military-civil fusion (the integration of China’s military and commercial technology sectors), or the broader geopolitical competition that increasingly framed the bilateral relationship. By late 2019, the trade war had evolved from a commercial dispute into a technology cold war, and the Phase 1 deal’s narrow focus on purchase commitments and IP enforcement felt increasingly anachronistic relative to the scope of the conflict.
What the Market Was Misunderstanding
The market’s enthusiastic response to the Phase 1 deal reflected a persistent misunderstanding of the nature of the US-China conflict. The consensus assumption was that trade tensions followed a negotiation arc: escalation, brinkmanship, deal, de-escalation. Under this framework, the Phase 1 deal was the beginning of normalisation, with Phase 2, Phase 3, and eventually a comprehensive agreement to follow. This assumption was almost certainly wrong.
The structural drivers of US-China competition, technological supremacy, military balance, ideological rivalry, are not amenable to trade deals. The bipartisan consensus in Washington favouring a harder line on China had only strengthened during the trade war. The tariffs imposed since 2018 had become a permanent feature of the bilateral economic relationship, supported by both parties in Congress. The market was pricing in resolution where the reality was managed rivalry.
The purchasing commitments were the most obviously unrealistic element. China’s commitment to buy an additional $200 billion in US goods over two years implied a near-doubling of Chinese purchases from the US, at a time when global trade was decelerating and China’s own economy was slowing. Trade economists at the Peterson Institute for International Economics calculated that China would need to purchase US goods at rates that exceeded peak historical levels across virtually every category. The COVID-19 pandemic would soon make the targets entirely unachievable, but even absent the pandemic, the commitments were aspirational rather than binding.
The Tariff Landscape After Phase 1
A commonly overlooked aspect of the Phase 1 deal was how much of the tariff structure it left intact. The deal’s tariff relief was modest: the 15% tariffs on $120 billion of List 4A goods (imposed in September 2019) were halved to 7.5%. But the 25% tariffs on $250 billion of Lists 1 through 3 goods, covering industrial inputs, machinery, and components, remained fully in place. The effective average US tariff on Chinese goods after the deal was still roughly 19%, compared to 3% before the trade war began. American businesses were paying approximately $50 billion per year in tariff costs, a tax that was largely passed through to consumers.
The tariff structure also created distortions in global supply chains. Multinational companies had spent 2018 and 2019 beginning to relocate production from China to Vietnam, Thailand, Mexico, and India, a structural shift that the Phase 1 deal did not reverse. The deal provided temporary certainty, but the tariff overhang and the risk of re-escalation meant that the supply chain diversification already underway continued. The US-China economic decoupling, which would accelerate dramatically during the subsequent tariff escalation, was already in motion.
Investor Implications
Equities: The Phase 1 deal removes the tail risk of further escalation in the near term, supporting a year-end rally in global equities. Trade-sensitive sectors (industrials, semiconductors, agriculture) benefit disproportionately. However, the remaining tariff structure represents a permanent drag on corporate margins for companies with significant China exposure. The market’s relief rally may overstate the degree of resolution achieved.
Agriculture: US farmers, who bore a disproportionate share of the trade war’s costs through lost Chinese export markets, stand to benefit from the agricultural purchasing commitments. Soybean, pork, and cotton futures have rallied on the announcement. But the commitments are dependent on Chinese state purchasing decisions, which are subject to political discretion and may not materialise at the scale implied by the targets.
Technology: The Phase 1 deal provides no relief for the technology cold war. Huawei remains on the entity list. US semiconductor companies remain restricted from selling advanced chips to Chinese firms. The technology decoupling that is reshaping the semiconductor, telecom, and AI industries will continue regardless of Phase 1’s commercial provisions. Technology investors should treat the trade deal and the tech war as separate, parallel dynamics.
Emerging markets and currencies: The yuan’s stabilisation above 7.0 per dollar, supported by reduced trade war risk, benefits emerging market currencies and equities that had been pressured by the strong dollar and trade uncertainty. However, the structural tariff overhang means the pre-2018 equilibrium in global trade is not returning. Emerging markets that have benefited from supply chain diversion (Vietnam, Mexico) may outperform those directly dependent on US-China trade normalisation.
Conclusion
The US-China Phase 1 trade deal is a political achievement that falls well short of an economic resolution. It averts further escalation, provides relief to specific sectors (agriculture, consumer goods), and reduces near-term uncertainty. But it leaves the fundamental architecture of the trade war intact: $250 billion in goods remain subject to 25% tariffs, the structural issues that motivated the confrontation are unaddressed, and the purchasing commitments are more aspirational than enforceable. For markets, the Phase 1 deal is a ceiling on near-term risk rather than a floor for long-term resolution. The US-China rivalry is a decade-long theme, and investors who treat Phase 1 as its conclusion will be surprised by what follows.
Sources: Full text of the US-China Phase 1 Economic and Trade Agreement; Peterson Institute for International Economics analysis of purchasing commitments; US Census Bureau bilateral trade data; USTR tariff action documentation; Bloomberg terminal data for equity, currency, and commodity market reactions.
Related Reading: The Phase 1 deal was a pause in the trade war that began with Trump’s first tariff salvo in 2018. The conflict would later escalate dramatically under Trump’s second term, culminating in Liberation Day. For how trade tensions evolved into broader geopolitical risk, see DeepSeek’s challenge to US tech dominance and the Trump 2.0 policy framework. The escalation that preceded the Phase 1 deal is examined in the May 2019 Huawei ban.
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