President Trump called it “amazing,” and U.S. Trade Representative Lighthizer said the China deal is “remarkable.” In my view, however, it is merely the best trade deal in the last 36 months of Chinese history, and it falls well short of two key objectives. Because the deal sets highly unrealistic goals for U.S. exports to China, the risk of disappointment and a return to tariff battles remains, so corporates in both countries are unlikely to feel secure enough to resume investment spending. Second, there are no signs that the two sides are preparing to use this pause in the tariff dispute to reconsider the poor direction the bilateral relationship is taking, towards decoupling and confrontation.

Despite this disappointing deal, the Chinese government seems relatively comfortable with the pace of economic growth and job creation, and is preparing only a very modest stimulus for 2020, designed to stabilize growth by mitigating the impact of the dispute with the U.S. and weaker global demand. I expect the consumer-driven economy to remain healthy next year, and the risks are largely on the upside: if the trade deal does lift the cloud of uncertainty, business sentiment will improve, leading to stronger CapEx spending and reduced pressure on wages. If the deal collapses, Beijing will implement a larger stimulus, to counter the negative impact on sentiment. The key downside risks next year are policy mistakes by Beijing; and if the trade deal fails, Trump could respond with dramatic efforts to contain China's rise, which would be negative for sentiment.

Deal risks

Based on the few details provided so far, the deal doesn't appear to represent a significant improvement on the current trade framework. Lighthizer said over the weekend that the 86 page agreement—which he described as “totally done”—will be signed in early January, and presumably more details will be available then.

I'm less concerned about the absence of breakthroughs than I am about the agreement's highly unrealistic sales targets, which could set up the deal to fail, leading to a return to tariffs or even a full-blown trade war.

In an interview over the weekend, Lighthizer said that the Chinese government has committed, in writing, to dramatically raise the level of its imports from the U.S. “Overall, it's a minimum of 200 billion dollars. Keep in mind, by the second year, we will just about double exports of goods to China, if this agreement is in place. Double exports. We had about 128 billion dollars in 2017. We're going to go up at least by a hundred, probably a little over one hundred. And in terms of the agriculture numbers, what we have are specific breakdowns by products and we have a commitment for 40 to 50 billion dollars in sales. You could think of it as 80 to 100 billion dollars in new sales for agriculture over the course of the next two years. Just massive numbers.”