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United States-China Trade Deal Follow-up

| December 17, 2018
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Investor confidence got a boost after President Donald Trump declared his meeting with Chinese President Xi Jinping at the G-20 summit December 1 “an amazing and productive meeting.” Both parties agreed to return to the negotiating table in earnest, with President Trump suspending planned increases in tariff rates from 10% to 25%, which had been slated to take effect on roughly $200 billion of Chinese imports at the start of 2019.

As the LPL Chart of the Day shows, the gesture will save U.S. firms billions in tariffs. However, LPL Chief Investment Strategist John Lynch noted, “Trade represents a surprisingly small portion of the U.S. economy, and the fiscal tailwinds from this year’s tax cuts and government spending boost should more than offset any tariff headwinds in the coming year, even if President Trump sees fit to increases levies should negotiations fall short of expectations.”

Statements released by each side immediately following the meeting left investors with more questions than answers, and answers to those questions were hard to find. However, as we anticipated, agreements are already solidifying on some of the “low hurdle” issues such as China’s commitment to increase its U.S. agricultural imports and cutting tariffs on U.S.-made automobile imports. Officials are also reportedly planning to replace the “Made in China 2025” program, targeting early-2019, with one that downplays China’s bid to dominate manufacturing and is more open to foreign firms’ participation in high-tech industries, though doubts remain about whether the changes will be implemented or be more cosmetic. Still, these deals are coming about more quickly than we expected, though “high hurdle” issues such as technology transfer, intellectual property protection, and cybertheft are unlikely to be resolved in a matter of months. For more insights on the recent trade agreement out of the G-20 summit, please see this week’s Weekly Economic Commentary.

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