Global markets celebrated the announcement of the China–US trade deal. The phase one deal provided a confidence boost after 2 years of simmering trade tensions, which had proved damaging to global economic growth.
The S&P/ASX 200 (INDEXASX: XJO) hit all-time highs last week following the signing of the deal with hopes high that growth would be reignited. But not all ASX shares stand to benefit – some may even suffer under the terms of the new deal.
What are the terms of the deal?
Under the phase one deal signed last week, the United States (US) agreed to halve the tariffs applied to $120 billion worth of Chinese goods to 7.5%. China in return committed to buy $200 billion of US goods over 2 years. This includes $50 billion in agricultural products, $50 billion in energy supplies, and $75 billion in manufacturing products. With China committed to buying from the US, it stands to reason that it may therefore buy less from other trading partners such as Australia.
Australian agricultural exports
Nearly 30% of Australia's agricultural exports went to China last financial year, with China a key export market for products including beef, wheat, wine, dairy, wool, and cotton. Shares in agricultural behemoth Graincorp Ltd (ASX: GNC) fell 1.7% on Thursday when the terms of the trade deal were announced.
By comparison, US agricultural exports to China have been falling, a trend that is likely to reverse under the new trade deal. Initial reports have suggested that agricultural exports under the trade deal will be focused on soybeans, poultry, and pork. This is good news for Australian farmers who don't export substantive quantities of these products.
Australian energy exports
China was the destination for some 36% of Australian liquified natural gas (LNG) exports in FY19. China's commitment to increase US energy supplies under the trade deal could therefore come at the expense of Australian LNG exporters. Shares in Woodside Petroleum Limited (ASX: WPL) slid 1.4% between the open of trade Thursday and Friday's close.
For now, existing long-term supply agreements should limit the extent of the threat. Nonetheless, China could cut back on LNG bought from Australia under short term contracts, which accounted for just under 10% of Australia's total LNG exports in FY19.
Foolish takeaway
The trade deal has the potential to divert Chinese imports from Australian suppliers to their US counterparts. The positive impacts of the deal on global growth could, however, offset these potential negative consequences. Longer term, markets will be looking for insights on phase 2 of the trade deal, with negotiations set to begin shortly.
