How Significant Is Trump’s Cease Fire In Trade War With China?
It May Be Fair To Call It A Victory For Trump. Of A Battle. Not Yet The War.
Update: Trump couldn’t leave good enough alone. Or perhaps he suddenly realized all he’d really done is given China a 90-day free pass. By Tuesday, he’s calling himself “Tariff Man” and Tweeting about how other countries are coming “to raid the great wealth of our Nation”. That refocused the spotlight and shifted investors’ narrative onto recession signals from the bond market, ballooning deficits, a sagging housing market, plunging energy prices (which may be good for consumers but are a sure sign of economic downturn), and imminent indictments (perhaps). The Dow Jones Industrial Average plummeted nearly 800 points, one of it’s worst single-day performances this year.
Who blinked? On the face of it, looks like China did. We say that for a couple of reasons. Prior to the meeting between President Trump and China’s President Xi at a meeting of world leaders this weekend in Argentina, China had remained steadfast in defiance of escalating tariffs Trump slapped on Chinese goods coming into the U.S. A trade war is really a siege: a test of who is willing or able to hold out the longest amid deteriorating conditions and internal pressures from industries getting hit hard by sanctions on both sides. In that context, China initially caught Trump by surprise by not buckling much sooner to U.S. demands, despite clear signs of damage to their economy.
In a sense, that gave China the upper hand for a while. In sitting down with Trump, they gave that up.
Another sign that this was at least a symbolic “win” for Trump: his trade assistant Peter Navarro was at the bargaining table in Buenos Aires. Navarro is probably best known for several anti-China propaganda films he produced. He is — not unreasonably — despised by the Chinese government. So if China was calling the shots at all in getting Trump to the table, they likely would’ve demanded Navarro not be part of it. Yet there he was, as you can see in the photo below (circled), in a position of equal stature to U.S. Trade Representative Robert Lighthizer (who is out of frame in this photo) and as we’ve repeatedly asserted, is one of Trump’s best hires, and one of the main reasons the President is having a fair amount of success on trade negotiations. He’s also taking over a lot of the China responsibilities from Treasury Secretary Steve Mnuchin.
So far, the U.S.-China agreement is mostly an agreement to try to agree. A deal to work on a deal. All that’s really been agreed to so far is that the U.S. will not increase tariffs on a range of products imported from China from 10% to 25% as it intended to in January. In exchange, China says it will buy an unspecified amount of unspecified products at an unspecified time from the U.S.. Presumably, those products will be from industrial, energy and agriculture sectors, the U.S. areas that have been hit hardest by retaliatory tariffs from China. Late last night, Trump Tweeted that China already agreed to cut tariffs on imports of U.S. cars, a move that right now would be largely symbolic, since there is almost no demand for American-made imported cars in China, although U.S. car companies manufacture a lot of vehicles there, designed specifically for the Chinese market.
The U.S. put a 90-day countdown clock on the new agreement: making it clear if there’s no progress on a substantial permanent deal by then, they can go ahead and do the tariffs after all, as originally planned.
Much of the coverage by mainstream media pointed out that China left that ambitious 90 day deadline out of its “official statement”. But we wouldn’t make too much of that because:
- There’s always going to be spin from both sides. For instance, Trump calling it “one of the biggest deals ever made” might also be an overstatement or at least premature, since no one knows what will be in the final deal yet, or if there even will in fact be one.
- China’s probably right, if it’s assuming the 90-days won’t be hard and fast as long as progress in negotiations is being made. Remember in NAFTA negotiations, many of those “strict” deadlines slid multiple times as long as everybody stayed at the table. (Trump also signed that new trade agreement with Canada and Mexico over the weekend. It still has to be approved by Congress). So we too would consider the 90-day time frame as a convenient prod, not an ultimatum.
However, there is something in China’s statement that’s not in the U.S.’s that we do find potentially highly significant. And that’s China saying:
“In accordance with the requirements of the 19th National Congress of the Communist Party of China, China will further take measures to deepen reform and expand opening up”.
(This is translated from Chinese via Google Translate.)
Why is that important? Because it possibly provides China some cover and some insight into how they will explain any decision if they ultimately decide to give in to any of Trump’s demands. Because they will never outright admit to giving in to any of Trump’s demands. In the context of the statement we quoted, they’ll now be able to say they didn’t give in to anything because it was part of something they were planning to do anyway.
And that allows China some flexibility, which probably bodes well for Trump.
At the same time, there are lots of reasons it might not be anything close to clear sailing ahead. China’s President Xi is in the process of consolidating political and economic power by exerting influence over China’s businesses and business people to a level they haven’t experienced in decades. As a side-effect of these new hard-line policies, China’s becoming less “foreigner friendly”, because overseas companies operating inside the country are hard to fully control. So some of the extreme restrictions President Xi is implementing on Chinese citizens involving how and where they can spend money, run completely contrary to some of the market-opening moves Trump is demanding. China might be able to dance around this for a while simply by demanding its industries buy more U.S. goods, but that won’t impact what we see as the heart of the trade dispute: abuse and theft of of intellectual property.
Then again, Trump may be willing to take a deal that makes him look strong even if it doesn’t address the most pressing long-term issues. And shipments of heavy machinery and manufactured goods are always more visible than software or copyrights. One tool Trump doesn’t have in negotiating with China is offering them U.S. military equipment, which is his panacea for righting U.S. trade imbalances elsewhere in the world.