China to propose restoring 2020 ‘Phase 1’ trade deal with US: report

China’s initial proposal to tariffs imposed by US President Donald Trump’s administration will centre on restoring the “Phase 1” trade deal signed in 2020 during Trump’s first term, the Wall Street Journal reported, citing sources.

Other parts of China’s plan will include a pledge to not devalue the yuan, an offer to make more investments in the US and a commitment to reduce exports of fentanyl precursors, according to the WSJ report.

On Saturday, Trump imposed 25 per cent tariffs on Mexican and most Canadian imports and 10pc on goods from China over fentanyl, a deadly opioid, and illegal immigration.

China denounced the imposition of tariffs on its imports and pushed back on fentanyl, but left the door open for talks with the US that could avoid a deepening conflict. In contrast, Canada, a long-time ally of the US, slapped retaliatory tariffs of 25pc on Canadian $155 billion ($105.17bn) of US goods.

The Phase 1 trade deal Trump signed with Beijing in 2020 ended a nearly two-year tariff war at that time. The deal required China to increase purchases of US exports by $200bn over two years, but Beijing failed to meet the targets as the COVID-19 pandemic hit.

Reuters reported in January that Trump had directed the USTR to assess China’s performance under that trade deal.

The Journal report also added that Beijing planned to treat TikTok largely as a “commercial matter,” meaning it would let investors in Chinese owner ByteDance negotiate a deal with interested bidders in the US.

Trump has previously said that he was in talks with multiple people over buying TikTok, including Microsoft, and would like to see a bidding war over the app.

The US Department of Commerce did not respond to a request for comment on the WSJ report outside regular business hours.

China’s commerce ministry was not immediately contactable for comment on the report due to the Lunar New Year holiday.

Trump’s trade war salvo rocks markets

Investors bought dollars, sold stocks and fretted about inflation in a scramble to assess the risk of a trade war after Donald Trump put tariffs on top US trading partners.

Trump’s orders for additional levies of 25pc on imports from Mexico and most goods from Canada, as well as 10pc on goods from China are light on detail. But they kick in on Tuesday and have jolted markets that had assumed Trump was mostly bluff and bluster.

The selloff extended beyond just Canadian and Mexican markets and stocks directly in the line of fire, to cryptocurrencies, stocks and even the safe-haven Japanese yen, as investors tried to second-guess the volatile president’s next moves.

Worries about the hit to growth from the inflationary impact of the wide-ranging tariffs and the uncertainty that creates for the Federal Reserve played a part, causing everything but the dollar and long-term US Treasuries to be sold.

“Trump’s trade war has started,” said Alvin Tan, head of Asia currency strategy at RBC Capital Markets in Singapore, noting it was hard to see the US dollar retreating any time soon.

The dollar has been the main mover, gaining as Trump headed for and then won office because investors figured tariff-hit countries would weaken their currencies to offset the impact.

On Monday, the euro fell 1.3pc on fears Europe may be next on the tariff list. Canada’s dollar skidded to a 20-year low on the greenback, China’s yuan slid in offshore trade, oil jumped, metals slumped and US equity futures dropped about 2pc on risks to US companies’ bottom lines.

Trump said the tariffs may cause “short term” pain for Americans, and while he would speak on Monday with the leaders of Canada and Mexico, which have announced retaliatory tariffs of their own, he downplayed expectations that they would change his mind.

He said tariffs would “definitely happen” with the European Union, but did not say when.

“Against the backdrop of sweeping tariff threats set to expand even more, the dollar has gained at the expense of currencies of US trade partners,” Mizuho analysts wrote.

The longer-run implications for other asset classes is less clear.

Stocks fell as analysts, such as those at Barclays, expect a drag on US company earnings and uncertainty on how the rest of the world responds. Canada has already ordered retaliatory tariffs and Mexico has flagged a retaliatory response.

Mizuho said equity bulls are re-evaluating their Trump trades.

“Equity bulls seduced by ‘Trump is good for equities’ narrative are subject to a rude wake-up call from the potentially jarring impact on growth/earnings amid retaliatory tariff spirals,” Mizuho said.

Shares in Hong Kong, Tokyo, Sydney, Seoul and Taipei made losses around 2pc. European stock futures slid 2.8pc.

“I don’t believe market participants have fully grasped the extent of the potential fallout yet, especially as responses from affected countries unfold,” said Tareck Horchani, head of prime brokerage dealing at Maybank Securities in Singapore.

He said many investors had built positions in dollars and gold in recent weeks but may still have been surprised by how quickly Trump’s threats turned to action this time around.

“It’s possible that some investors underestimated Trump’s resolve on tariffs, expecting more negotiation rather than immediate action.”

Anxiety

The difficulty in assessing the effect of tariffs is because their duration and precise rationale remain unknown.

Some investors still believe some sort of deal is possible or that tariffs will be quickly dismantled if Trump gets what he wants.

Trump has linked the tariffs to the flow of migrants and drugs — particularly fentanyl — into the US and demanded crackdowns in Canada, China and Mexico.

China and Mexico have said fentanyl is America’s problem, so prospects of a breakthrough are unclear.

China, still closed on Monday for the Lunar New Year holidays, said it would challenge Trump’s tariffs at the World Trade Organisation and take unspecified countermeasures.

“These generalised tariffs that cover a much wider range of products and are targeted toward social policy have usually proven to be a mistake,” said Rick Meckler, partner at Cherry Lane Investments in New Vernon, New Jersey.

“I think that’s why the market has looked at this sceptically, and with anxiety, all along,” he said. “A full reaction won’t be reached until it’s clear this is the policy, however.”

Debt markets, meanwhile, seem caught between the negative inflationary implications of higher consumer prices and the potential for rate cuts due to the hit to growth — which ought to be positive for bonds.

Benchmark 10-year Treasuries rallied slightly, pushing yields about 4.5 basis points lower to 4.52pc.