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Phase 1: What it means for trade, the markets, and India

'A momentous step towards a future of fair and reciprocal trade is how the American President described the signing of Phase 1 of the US-China trade deal. The focus of the deal was the US$200bn of incremental goods and services that China has agreed to buy from the United States that is set to give the Trump re-election campaign a significant boost. In today's post we understand what was included in phase one of the deal, and its implications for global markets, as well as India's future.

What's in the deal?

Concluding the first part of the saga that has been going on for more than 18 months now, the leaders of the two countries signed the 86 page document wrapping up the first phase of the trade deal. The most important highlight of the deal for America, and certainly the aspect Trump will use the most in his rallies is, China's commitment to buy an additional US$200bn worth of goods & services over their 2017 purchases. This is a significant jump from the US$186bn that they imported before the trade war began. This also includes an additional US$32bn of agri-products that will have an appeal to key American demographics. On the part of US, they will cut back their tariffs on the US$160bn of goods from 15% to 7.5% and suspend indefinitely the tariffs that they were going to apply in Dec. The 25% tariffs on the US$250bn worth of Chinese goods will continue to stay after this round. The deal also includes tighter norms around intellectual property and currency which is largely targeted at China.

What does this mean for Global markets?

While expectations around the deal going through were broadly priced in, the deal finally going through will definitely give the global markets a sigh of relief. What the deal also does is, increase dramatically the chances of a Trump Presidency, so sectors that were hit by the possibility of a Warren win (Healthcare, BigTech, et al) should, all else equal, see potential for outperformance. With neither party having much incentive to disrupt things now, this should mean relatively stable sailing, atleast, until the elections end.

What does this mean for India?

On the economic front, it presents both a challenge and an advantage. While trade improving between the two nations should lead to an improvement in key metals and other industries (lower possibility of Chinese dumping), aiding the recovery in some of our key industries, it also gives us a much narrower window to attract exiting firms from China to build our manufacturing base, something that a few southeast Asian countries seem to have done quite well. On the market's front, this should indicate a risk-on environment, meaning investors will look to deploy capital in emerging markets. But, given the inflated levels at which our benchmark Nifty 50 is, the reaction here will most likely be muted.

A special shout-out to Arjun Kumar from NMIMS who has joined our editorial team as a winter intern and now proof-reads all posts. He plays an integral part in our goal of delighting our readers, and we are happy to have him on the team.

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