Much Ado About Everything No 13: Trade — Reprieves, Not Resolutions

Nothing at the G20 summit significantly reduces the risk of escalating trade wars on several fronts.

The compromise…was less a breakthrough than a breakdown averted.”

Mark Landler, The New York Times, 1 December 2018

In my 28 November article for The Global Lead, I suggested that if Xi Jinping and Donald Trump were to strike a deal on trade in the margins of this weekend’s G20 summit:

“…it would be about as substantive, at best, as Mr Trump’s 12 June ‘deal’ with Kim Jong-un — in other words, a temporary truce which leaves the current tariffs in place while postponing the threatened escalation pending further talks…”.

In fact, the agreement which was reached at last night’s dinner is, if anything, considerably worse in that it sets a highly ambitious deadline of 90 days (which I assume starts on 1 December — so, end-February) to reach a substantive agreement which would, on the face of it, involve major concessions by China and which has eluded negotiators for over a year now. No doubt investors will be breathing a sigh of relief this morning; but they should also be in no doubt that, as things stand, not only is the trade war between China and the US far from over but also that the probability of escalation, albeit now delayed by a few weeks, remains high.

It is not entirely clear what the next steps will be. But we do know that the ‘pro-deal’ faction in Washington, ie Treasury Secretary Steve Mnuchin and Chair of the National Economic Council Larry Kudlow (both of whom were at the dinner table last night) have been provisionally lining up talks in Washington with China’s top negotiator Liu He for mid-December. So far, so good. But keep in mind that, to date, every time a member of ‘team Trump’ has struck some sort of deal with China on trade it has promptly been torpedoed by the trade hawks, ie USTR Robert Lighthizer and special advisor Peter Navarro. The fact that both those gentlemen were also at the table last night does not give me any reason to believe that things will necessarily be different this time around.

Nevertheless, for now Mr Trump has some favourable (and timely relative to his deepening troubles at home) headlines in that China has offered to buy very substantial (according to a White House statement), but unspecified, amounts of agricultural, energy, industrial products from the US, consistent with addressing the US President’s obsession with the trade imbalance.

From his perspective this sits nicely alongside the 30 November formal signing of the United States-Mexico-Canada Agreement (USMCA), ie the ‘new’ Nafta. However, it is far from clear that the agreement will be ratified by Congress, as is underlined by the ongoing push to try to get it through in the current ‘lame duck’ session before the Democrats take control of the House on 3 January; and by Mr Trump’s threat late yesterday to give formal notice of his intention to withdraw the US from Nafta (which, constitutionally, it is not at all clear he can deliver on), in order to pressure legislators to approve the USMCA.

Confirming Mr Trump’s almost total focus on trade around the summit, immediately prior to his meeting with German Chancellor Angela Merkel yesterday morning he stated publicly as follows:

“We have a tremendous trade imbalance, but we’re going to get that straightened out. We all understand each other.”

He may have been referring exclusively to the Germany/US imbalance. But, in practice, this is probably another sign that Mr Trump remains firmly minded to slap tariffs on auto imports from the EU, absent some major concessions by Brussels.

This morning, the Financial Times quotes China expert Abigail Grace at the Center for New American Security as saying of last night’s agreement between Xi Jinping and Mr Trump:

"The trade war [with China] is far from over yet".

Investor and others would do well to assume, for now at least, that the same is true for the Nafta partners and the EU and quite possibly, given the GM job cuts in the US, for Japan and South Korea too.

Update 4 December

If you were understandably bemused by differences in the official statements from Beijing and Washington which immediately followed the 1 December dinner, you were probably even more so by statements coming out of Washington alone since then.

First, Mr Trump's tweet to the effect that we are about to see a huge reduction (total removal?) of China's tariffs on cars imported from the US could not be explained by Mr Navarro who seemed unable to recall anything at the dinner to substantiate this. Nevertheless, there are hints from Beijing that China may consider cutting tariffs back from the current 40% to the 15% which was in force before the trade war started.

Second, Mr Kudlow's public claim that the 90 days would begin on 1 January was promptly corrected by the White House to the effect that I had begun immediately!

All this being said, the most important thing which did emerge yesterday was that Mr Lighthizer (rather than Mr Mnuchin) will lead for the US in the ensuing talks with China. Procedurally (and in terms of real expertise), I think this is correct. But it will not be welcomed by China. From an investor perspective, the consolation of having an expert 'hawk' leading for the US is that it minimises the risk of agreement being declared by the US only for the President again to reject whatever is on the table.

Alastair Newton

Image credit: Reuters