Are Trade Deal Troubles Brewing?

In January, U.S. President Donald Trump finally signed Phase One of the trade deal with China after nearly two years of back and forth negotiating.

At the time, Trump called it "the biggest deal anybody has ever seen."

"The greatest impact may well be on American agriculture," Vice President Mike Pence said at the signing. "Some $40- to $50 billion in purchases secured in this deal that will result in greater prosperity for farmers all across the land."

Last week, Trump threw a wrench in the trade deal when he announced he would take steps to revoke Hong Kong’s favored trade status with the U.S. after China's parliament passed a law essentially banning protests in Hong Kong.

"I am directing my administration to begin the process of eliminating policy exemptions that give Hong Kong different and special treatment," Trump said.

"My announcement today will affect the full range of agreements that we have with Hong Kong, from our extradition treaty, to our export controls and technologies," Trump added. "We will take action to revoke Hong Kong’s preferential treatment as a separate customs and travel territory from the rest of China."

Markets shrugged off the news as they were expecting Trump to be tougher on the matter.

However, it appears China thought the move was drastic enough to balk at its commitment to purchase agricultural products as part of the trade deal.

China reportedly told state-owned companies to halt purchases of soybeans, pork, corn and cotton from the U.S. in retaliation for the administration's moves regarding Hong Kong. China will reportedly expand the order to additional agricultural products if the U.S. takes additional actions on Hong Kong.

"China has asked main state firms to suspend large scale purchases of major U.S. farm products like soybeans and pork, in response to U.S. reaction to Hong Kong," the source said. "Now we will watch and see what the U.S. does next."

A second source said a worst-case scenario would be China walking from the Phase One trade agreement altogether. "There’s no way Beijing can buy goods from the U.S. when receiving constant attacks from Trump," the source said.

It appears the largest beneficiary of the spat could be Brazil. The world's largest soybean exporter exported a record 16.3 million tonnes of soybeans in April.

While markets continue to rise on news of positive developments with China as they shrug off negative developments, it remains to be seen how they would react if the highly-touted trade agreement falls apart entirely.