What China can offer to buy from the U.S.

Prospects for a new U.S.-China trade deal, focused on China increasing purchases of U.S. goods in sectors like energy and agriculture, have re-emerged, though Capital Economics warns tariffs could hit 60% by Q2 if no agreement is reached. While China theoretically could boost annual U.S. imports by hundreds of billions, Capital Economics expresses significant skepticism regarding compliance due to economic and geopolitical hurdles, suggesting any agreement would likely be short-lived and fail to resolve deeper trade imbalances.

Analysis

The prospect of a new U.S.-China trade agreement faces significant headwinds, with the prevailing analysis from Capital Economics suggesting a high probability of escalating trade tensions. The firm's working assumption is that U.S. tariffs on Chinese goods could rise to 60% as soon as the second quarter, a material risk for global markets. While any potential deal would likely follow the structure of the 2020 Phase One agreement—focusing on increased Chinese purchases of U.S. goods—deep skepticism surrounds its implementation. The previous deal's target for a $200 billion annual increase in imports was not met, and China is perceived as having ample economic and political reasons to avoid compliance with future commitments. Although Capital Economics calculates a theoretical capacity for China to boost U.S. imports by as much as $800 billion, primarily in energy and agriculture, this is viewed as an upper bound, not a realistic forecast. Structural limitations, U.S. export controls on advanced electronics, and geopolitical friction are cited as major constraints. Consequently, any agreement is expected to be a short-lived political maneuver to delay tariffs rather than a lasting resolution to underlying trade imbalances, with a high risk of collapse once U.S. enforcement wanes.

Key Decisions for Investors

• Investors should brace for heightened U.S.-China trade volatility and price in the material risk of tariffs escalating to 60% by Q2, as this is the base-case scenario presented by the analysis.
• Treat any announcements of a new trade deal with extreme caution, as the likelihood of sustained Chinese compliance is considered low; focus on the risk to global supply chains rather than speculative, short-term purchase commitments.
• Monitor U.S. agriculture and energy sectors for potential headline-driven volatility, but be aware that any surge in demand from China would likely be politically motivated and unsustainable.
• Given the persistent threat of export controls, maintain a cautious outlook on technology and semiconductor companies with significant exposure to the Chinese market.