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From Shanghai to London, stocks rallied on Friday morning as a “Phase One” trade deal was reached between China and the Trump Administration—that is, until the details were announced.

By noon in New York, the major indices still trading were swooning, with the S&P 500 and Dow Jones Industrial Average in negative territory, ceding big early gains.

What happened?

With the details still scant, the international markets initially saw the announcement as a sign the trade war was winding down, dissipating a massive cloud hanging over global GDP and corporate growth prospects. (They were also reacting to the historic results of the British general election and the belief that a bit of clarity would emerge in the Brexit picture).

Later in the day, the markets’ exuberance was largely dashed by what’s not in the deal.

“I think we’re pretty much where we were in May,” says Usha Haley, W. Frank Barton distinguished chair in international business and professor of management at Wichita State University.

The first phase includes postponement of $160 billion in additional tariffs on consumer goods, which had been scheduled to start on Dec. 15, and a roll-back on some existing tariffs that could be reinstated in the future.

In a press conference on Friday, Chinese officials said the agreement will cover agricultural purchases, intellectual property protection, tech transfers, and, according to Haley, “financial opening and currency.” It’s still unclear to many what that actually means.

“I think they agreed to continue negotiations, that the negotiations will cover these areas, and that they agreed on the purchase of agricultural products from the United States and on a reduction of the tariffs,” says Haley.

If nothing else, the moves reduce tensions that could further harm the U.S., Chinese, and global economies.

Without the pause on the new tariffs, China would have added tariffs of its own that “would cover corn and wheat, rare-earth magnets, small aircraft, and those would be at the 5% to 10% level,” says Raj Bhala, a distinguished professor at the University of Kansas Law School. “They would reimpose a 25% tariff on all US-made cars and a 5% tariff on all auto parts.” Such moves could have a big impact on U.S. jobs, given the importance of China as a market for U.S. automakers.

“It’s been clear for some time that both President Trump and President Xi Jinping want to find a way to deescalate the conflict and secure some type of deal,” says Robert Holleyman, a partner at the law firm of Crowell & Moring and former deputy U.S. trade representative. “We also understood that the toughest issues in the discussion in the US and China are not likely to be solved at this time, or are they likely to be solved in a part one of a deal.”

So far, China has offered no public indication of how much in agricultural goods they would purchase. The U.S. has pressed for a fixed number. But even a large guaranteed buy would be unlikely to exceed former levels of exports. Across all agricultural categories, the U.S. sold $25.9 billion to China in 2015. In 2018, that number was down to $9.2 billion.

During talks, Chinese negotiators have been unwilling to commit to blanket amounts, saying they would only agree to “market demands,” Bhala noted. China has widely diversified its suppliers of agricultural products, spending more with export nations in Europe and South America.

“I find the irony rich that when it’s been a [U.S.] bedrock principle for years, for decades, to let the market drive trade, the Chinese are pushing back on [a non-market-based fixed] number,” says Nicole Lamb-Hale, a managing director at risk consultancy Kroll and a former U.S. International Trade Administration official in the Obama administration. “This deal is an emaciated deal—it isn’t even skinny.”

It is unclear to what degree such intellectual property issues—forced transfers of technology, cyber-theft of secrets, and enforced joint ventures with Chinese companies—that were the purported reason for the trade war will be addressed.

“They go to fundamental things that deal with long-term competitiveness,” Holleyman says. “The consequences are vast, and these are things on which China is trying to build its future growth and success off the back of IP that was acquired improperly.”

In a way, any concrete deal would be an improvement in relations between the two countries. Attempts at a deal early in 2019 came to nothing, with a March 1 deadline achieving nothing. Then there was the supposed potential for a deal that Trump and Xi could sign in April but which never occurred.

Will this round of promise be any different?

“Sometimes the illusion is as important as reality,” Haley says. “But you can’t continually portray illusion as reality. It’s always great that people are talking again. But that doesn’t mean it will happen. I seem to remember they were in this exact spot about six to nine months ago. I remember the same talking points were on the table and then nothing happened. The Chinese walked away.”

“If all we get is more soybean purchases, this is a shame,” Lamb-Hale says. “There’s so much work to be done. There’s some stability. There is no victory.”

The markets are starting to conclude the same.

The Markets Have Spoken: Phase One Trade Deal Between the U.S. and China Is ‘No Victory’

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