Trump Trade Deal With China Sparks Higher U.S. Stock, Oil Prices

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Trump TradeDeal With ChinaSparks Higher U.S. StockOilPrices

By Jim Owen

A stock market surge, along with rising oil prices, has resulted from a renegotiation of the U.S.-China trade agreement.

The countries’ presidents, Donald Trump, and Xi Jinping, discussed the deal during a dinner meeting at the recent G-20 summit in Buenos Aires, Argentina. They agreed to suspend trade tariffs for at least three months, to give both sides time to resolve a conflict over China’s policies, according to the Daily Herald.

Trump said he will not follow through with his threat to impose tariffs on an additional $200 billion worth of Chinese products on Jan. 1. An administration official announced that in return, Xi pledged to purchase more American goods, which would lessen the United States’ huge trade deficit with China.

Earlier this year, the administration slapped tariffs on $250 billion worth of goods from China. Xi retaliated with import taxes on $110 billion worth of U.S. products. He and Trump have at least temporarily avoided a further escalation of the trade war, which poses risks to American businesses and workers.

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Corporate leaders are worried about potentially lower profits and slower economic growth, while employees affected by China’s trade tariffs could lose their jobs.

Impact on U.S. Markets

American industries welcomed trade truce with China. They also cheered a decision by Federal Reserve Chairman Jerome Powell to hold off on raising interest rates for the foreseeable future. Prices being paid for crude oil went up dramatically due to the developments, and U.S. stock-traders celebrated by posting the largest one-week rally on Wall Street since early 2012.

A key indicator of economic vitality, the S&P 500 index, increased about 5.7 percent following the Trump-Xi agreement. Another important gauge, the Dow Jones Industrial Average, closed at 25,756 points on Monday after gaining 214 points. Earlier in the day, the Dow was up 441 points.

Other indexes also improved. The Nasdaq composite went up 96 points to 7,426, while the Russell 2000 (which involves the stocks of smaller companies) rose three points.

The response was not the same in all industries. The Daily Herald noted that tech firms, industrial companies, and financial institutions led the uptick in trading; while utilities and home-products manufacturers posted losses.

Stock prices in the car-making industry escalated after Trump said Xi would reduce tariffs on U.S-made vehicles. However, Beijing officials did not confirm the president’s claim. Also, the majority of American cars are manufactured in China rather than at U.S. plants.

Stock values climbed at Ford Motor Co. (by 3.1 percent to $9.70 per share), General Motors (by 2.2 percent to $38.77) and Tesla (by 2.9 percent to $360.68).

The flurry on Wall Street marked a reversal of recent trends. Two months ago, fears concerning the trade war prompted stock prices particularly those of tech and energy companies to plummet.

Impact on World Markets

The trading surge spread to other countries, as well, though the excitement was more tempered. The DAX index in Germany jumped nearly 2 percent, the CAC in France added 1 percent and the FTSE 100 in the United Kingdom rose 1.2 percent.

The Hang Seng exchange in Hong Kong improved by 2.6 percent, the Nikkei in Japan edged up 1 percent, and South Korea’s Kospi experienced 1.7 percent higher stock prices. Markets in Taiwan and other Southeast Asia posted similar gains, while Australia’s S&P ASX/200 increased 1.8 percent.

Oil Industry Optimism

Qatar’s plan to pull out of the Organization of Petroleum Exporting Countries next month was a factor in the resurgence of oil prices. Never before has any of OPEC’s 12 member nations withdrawn from the alliance since it was formed 58 years ago.

Also, the province of Alberta, Canada, recently vowed to significantly reduce its production of oil in an attempt to bolster prices. We expect OPEC to follow suit and agree to a production cut, Goldman Sachs analysts wrote.

Benchmark crude, a reference price for oil, was 3.2 percent higher (at $52.55 per barrel) on the U.S. stock market as a result of all the news. An international marker is known as Brent crude increased 3 percent (to $61.21 per barrel) in London.

Oil prices had been declining because of supplies outpacing demand. Ramped-up production in the United States, Russia, and Saudi Arabia have more than made up for less drilling in Iran and Venezuela. A worldwide economic slowdown and currency devaluations in some countries have further weakened demand for oil.

Underlying Issues Unresolved

Economists warn that the temporary trade peace between the United States and China, despite its beneficial effect on stock and oil prices, is not a solution to long-standing disputes.

Alec Phillips, who heads the political research department at Goldman Sachs, acknowledged that Trump and Xi at least temporarily improved relations between the countries by agreeing to the truce. He said the uptick in the stock market was not surprising because the pause in enacting tariffs made traders more optimistic that a comprehensive agreement may eventually be reached. On the other hand, Phillips warned that the truce merely extends the period of uncertainty, and that many “underlying issues remain.

Helen Qiao, an economist at Bank of America / Merrill Lynch who specializes in Asian issues, predicted that the U.S. trade imbalance with China will get better as the countries work out their opposing views. She pointed out that China reduced its orders for American goods, turning to other nations instead, late last year due to conflicts with the Trump administration. As a result, an increase in imports of American agricultural products would lessen the imbalance.

Qiao said she also foresees more willingness by China to make its markets, particularly those involving services, more open to the world. She added that Chinese officials might concede to some U.S. demands for the protection of intellectual property.

Intellectual Property and Technology Transfers

The Chinese intellectual-property (IP) law is designed to safeguard the country’s creative and artistic ideas, copyrights, patents, trademarks, trade secrets, publicity rights, and moral rights.

Trump has accused China of stealing intellectual property from U.S. firms. During his 2016 race for the White House, he promised to change the way the two countries do business. So far, Trump and Xi have failed to reach an agreement on the matter.

Steven Okun, a senior adviser at McLarty Associates, told CNBC that although there was scant reference to IP in the official White House statement concerning the Xi-Trump meeting, U.S. officials consider the matter a core trade issue dividing the two countries.

Okun said the trade war stems from findings in investigations by the U.S. trade representative’s office (USTR). The agency has placed 36 countries on its Priority Watch List, which consists of trading partners with allegedly insufficient IP regulations.

China is one of 12 nations on the list. The others are Algeria, Argentina, Canada, Chile, Colombia, India, Indonesia, Kuwait, Russia, Ukraine, and Venezuela.

The USTR wrote that previous and current issues regarding IP need to undergo more strenuous analysis because of China’s coercive  approach to technology transfers and impediments to meaningful enforcement of IP regulations. The office also cited what it called infringing activity concerning the theft of trade secrets, online piracy and other matters.

The transfer issue is related to China’s requirement that foreign corporations reveal information about their technology in order to access the Asian giant’s massive consumer market.

EconoFact noted that Trump is not the first U.S. president to criticize the practice. The organization alleged that forced technology transfers deter innovation, and impose losses on U.S. firms that may amount to hundreds of billions of dollars because the nature of the economy allows Chinese officials to force other countries to accept transfers on terms that harm them.

Beijing requires foreign companies to cooperate with Chinese firms in such a way that they cannot maintain a controlling stake, according to EconoFact. That means U.S. and European carmakers must serve the Chinese market, forcing them to disclose details about their technology. The same is true in industries owned by China’s communist government such as transportation, telecommunications, and electricity.

Adam Posen, president of the Peterson Institute of International Economics, told CNBC that solutions to the debates over TIP and technology transfers will not come quickly or easily. He said the Trump administration will have a hard time finding a way to claim victory in the disputes. Officials in much of the world do not agree with the United States and other western nations that the issues are all that critical, according to Posen.

In another CNBC interview, Michael Hirson of the Asia and Eurasia Group said national security is a major consideration in trade matters. He pointed out that trade is just one way that the United States and China are competing for power and influence on the international stage.

McLarty’s Okun lamented that narrowing the trade imbalance by the time the three-month trade-truce period ends is unlikely. He suggested there is too much to be resolved in such a short time span, from dealing with prior violations to crafting a plan for the future.

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