By Josh Mitchell 

WASHINGTON -- The U.S.-China trade deal would deliver muted benefits to the American economy, leaving in place most tariffs on Chinese goods and uncertainty for the world's two largest economies.

The limited deal, announced by officials in both countries on Friday, would halve a 15% tariff the U.S. slapped on $120 billion worth of Chinese-made goods on Sept. 1, including apparel, shoes and accessories. It would also cancel a 15% tariff on $156 billion of goods -- including smartphones, laptops and toys -- set to take effect Sunday.

U.S. officials said the deal also calls for increasing exports to China by $200 billion over two years, including a big increase in farm exports. U.S. officials envision cutting the trade deficit; helping U.S. industries such as agriculture, factories and tech companies; and boosting overall growth.

Economists said the deal would likely reduce some consumer prices and perhaps give some reassurance to businesses that the two-year trade dispute is headed toward a broad resolution.

But the deal leaves in place 25% tariffs on $250 billion of goods that went into effect last year, including plastics, chemicals and machinery. Also, since the deal is only "phase one" of longer-term talks, it may only remove some of the business uncertainty that economists and Federal Reserve leaders say has held back the U.S. economy, which is plodding along in its longest expansion ever.

The deal is a welcome sign of a de-escalation of the trade tensions, said economists at Wells Fargo, but it did little to change their view that the trade dispute would continue to weigh on the economy.

"An argument could be made that the trade war's biggest cost is not in the specific dollar terms we have calculated, but rather the increased uncertainty and the potential toll on business spending," Wells Fargo economists Tim Quinlan and Shannon Seery said in a note to clients. "We suspect today's deal is short of the sort of reassurance sought by many businesses worried about trade."

Robert Daly, director of the Kissinger Institute on China and the United States at the Wilson Center, raised doubts about the ability of the U.S. to produce enough farm products to meet its export goals. It isn't clear, he said, "that the Heartland has $50 billion in goods to sell."

Some economists said the biggest benefit would be heading off Sunday's tariffs, which would have directly hit consumers by driving up the price of popular items including electronics.

The tariffs already in place are set to drive up costs for U.S. households by more than $400 a year, on average, economists say. One estimate says that if Sunday's tariffs went into effect, that tab would have exceeded $550. Reducing the September tariffs and canceling Sunday's tariffs will give households a bit of a respite, said economist Mary Lovely of the Peterson Institute for International Economics.

Households "might not know that they dodged a bullet here," she said.

Consumers are already spending more on certain goods because of the tariffs, the first round of which took effect in 2018, although businesses have absorbed some of the increased costs and U.S. imports from China have dropped.

Bryan Riley of the National Taxpayers Union, a nonprofit research group, said Sunday's tariffs would have hit the poorest households the hardest. "It would be like a reverse Christmas bonus," Mr. Riley said.

The $22 trillion U.S. economy has remained steady despite the dispute and a slowdown in global growth. The Fed on Wednesday projected U.S. growth would expand 2.2% this year and 2.0% next year.

But there is evidence the trade slowdown has held the economy back. Business spending on long-term projects -- including facilities and equipment -- rose 1.3% in the third quarter compared with a year earlier, the weakest 12-month gain in three years.

Many economists believe a big reason for the slowdown is uncertainty over the trade dispute. Some companies have been holding off on key decisions -- such as how many people to hire or where to locate a plant -- as they wait for a trade deal.

That uncertainty is one reason the Fed cut its benchmark rate three times this year. Fed Vice Chairman Richard Clarida on Friday said it was too soon to judge how a limited agreement to halt the trade war between the U.S. and China would influence the economy, but he said any reduction in policy uncertainty is "obviously a positive for the economic outlook."

The tentative deal with China and progress on another trade dispute could reduce some of that uncertainty. The U.S. also reached a new trade agreement in recent days with Mexico and Canada, a development that also could offer support for the U.S. economy.

But the U.S.-China dispute has been marked by fits and starts and it is entirely possible the talks could yet collapse. President Trump said Friday that the tariffs still in place will be used as leverage in the next phase of talks with China.

Gregory Daco of Oxford Economics raised doubts about how much certainty a "phase one" deal would provide.

"From a business perspective if you know these tariffs can come back you're still going to be cautious about your actions, your investment, your hiring decisions," he said.

--Nick Timiraos contributed to this article.

Write to Josh Mitchell at joshua.mitchell@wsj.com

(END) Dow Jones Newswires

December 13, 2019 15:52 ET (20:52 GMT)

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