Under the terms of the “Phase One” trade agreement, China will have to ramp up US imports by $100 billion next year. In relative terms, this amounts to an increase of 54% (compared to imports in 2017) and, the tight deadlines for a “rebalancing" of trade raise the question of who will pay for this new import. The increase in imports should either be absorbed by China domestic demand or compensated with a respective decline in trade with other countries. China’s “organic” growth of 6% per year allows us to immediately reject the first assumption so, if the parties will honor commitments, China’s trading partners will inevitably suffer, which will have to be squeezed.

The question is: who will bear the brunt?

As for manufactured goods, the potential victims of the trade agreement are the EU, South Korea, and Japan. In a recent article, the IMF estimated that almost a half of the agreed increase in imports of US goods ($42 billion) would be achieved by reducing imports of goods from the EU. Korea and Singapore’s losses of from the trade deal could reach 1% and 1.9% of GDP, as the export of those countries is likely to reduce as well.

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Potential export losses from the trade deal between the US and China.

Of the “promised” $100 billion increase in imports, about 16 billion will go to agricultural products, the rest to other goods and services. Assuming that goods will make up 75% of new imports, and services 25%, in monetary terms, a positive change in the US trade balance should be approximately $63 billion (84 * 0.75). For the EU, this will mean a reduction in exports of industrial goods by 63 * 0.5 = 31.5 billion. The total damage could be almost $90 billion.

Taking into account the significant risk for the Eurozone manufacturing sector, the outlook for euro in the medium term will depend on the pace of materialization of this risk, i.e. how quickly China will start to implement the import agreement. If the “transfer” of imports from one trading partner to another starts to get confirmation in the China export-import data, we can expect another subsequent plunge in activity indices (business climate, export orders, etc.) in the Eurozone and, accordingly, weaker EURUSD.

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