What's going on?
The US and China reached a truce late last week, bringing a trade war that’s rattled markets for almost two years closer to a resolution. Phew. (Tweet this)
What does this mean?
Under the truce, the US has agreed to cut existing tariffs on roughly $110 billion of Chinese goods in half – though it’ll keep a separate set of 25% tariffs on roughly $250 billion’s worth for now. But the biggest relief was the cancelation of new tariffs that had been scheduled to kick in on Sunday. China, in exchange, has committed to large purchases of American energy and farm products, as well as a host of other US-manufactured goods. And if it fails to live up to those commitments, the deal also gives the US the right to bump tariffs back up to their original levels.
Why should I care?
For markets: So long, Scrooge.
The US-China trade war has cast a long shadow over the global economy. A step toward resolution, then, should boost relieved investors’ appetite for riskier opportunities. That might be why, when the US president first announced a deal was close on Thursday, the country’s stocks hit a record high. Companies that sell consumer electronics, in particular, are feeling the Christmas cheer. Take Apple: the tariffs that were scheduled to kick in on Sunday could’ve added as much as $150 to its iPhone’s price tag during the crucial holiday shopping season.
The bigger picture: It’s only the beginning.
While Friday’s agreement is being branded a “phase one” deal, investors are already turning their attention to phase two, especially since this agreement has only rolled back a small batch of existing tariffs. The longer those tariffs persist, the more uncertainty there’ll be for businesses – and the bigger the toll it’ll take on the global economy. Maybe that’s why US stocks initially fell in response to the news on Friday…