There Will Be No China Trade Deal
The stock market these days is obsessed with the trade war for obvious reasons. With any news that seems to indicate that a deal might with China be possible, the market rallies. On the flip side, news that the parties are making no progress with a deal sends the market into a tailspin. But, at this point in time, it is hard to imagine just what the incentive would be for the Chinese to make a deal with Trump. And Trump’s own actions in the last few weeks have actually made a deal less likely.
The 2020 election is just 15 months away and the Chinese can read polls just like everyone else. Trump barely squeaked out an Electoral College victory in 2016 running against a third Obama term and a highly polarizing and disliked Democratic candidate. In the end, he still needed help from Russia and, most of all, James Comey, to win. Trump has done nothing to improve his situation since that time, focusing on consistently playing to his base rather than expanding it. His policies are putting some of his core constituencies in rural America under enormous strain. He is massively underwater in his three “trifecta” states of Michigan, Wisconsin, and Pennsylvania with double digit deficits that would seem to be hard to make up even when the Democratic field is whittled down to one candidate.
With that in mind, it seems hard to imagine the President Xi would have any reason to give Trump any kind of win in the trade war right now. There is no rationale for China to do anything to bolster Trump’s electoral chances and give the President four more years to battle with China. At present, with the possible exception of Sanders, there is no Democrat who looks to have any interest in using Trump’s approach to continue the trade war through tariffs.
The tariffs are clearly inflicting some pain on the Chinese economy. The country posted its lowest growth rate in 27 years in the second quarter. The industrial sector seems to be contracting and the producer price index turned negative for the first time in three years, indicating producers may be selling goods at or even below cost. But Xi has plenty of tools to deal with that economic pressure. The government’s recent tax cuts should be kicking in and it is now encouraging additional lending to help stabilize the manufacturing center. It is still keeping tight controls on the property market but any easing in that area could also provide another short term stimulus. And while the US accused China of manipulating its currency in the wake of the devaluation of the yuan after the announcement of new Trump tariffs, the Chinese were actually abandoning their efforts to prop up the currency and letting the market decide the appropriate price level instead and slightly easing the pressure on the country’s exporters. But devaluation is yet anther tool the Chinese have to fight Trump’s tariffs.
Moreover, Trump’s actions in other areas will actually stiffen Beijing’s backbone in not agreeing to a trade deal before the 2020 election. Trump has basically given a green light to Xi to do whatever he wants to resolve the revolt in Hong Kong, telling Xi back in June that it was an internal matter for China and providing virtually no support for the protesters since. Any crackdown in Hong Kong will be a clear signal to those on the mainland. If it happens, it is hard to imagine Chinese businesses, who primarily rely on the good will of the party, are going to rise up in protest over the effects of the trade war. The same can probably be said of the emerging middle class in the country which is constantly being fed the government line that the US is the aggressor in the trade war as well as the one stirring up the tensions in Hong Kong.
In addition, the trade war is having repercussions for other economies in the region. China’s economy is an important driver of growth in other South Asia economies. Some, like Vietnam, are massively benefitting from the trade war as Chinese companies essentially route their products through that country to avoid the tariffs. Other countries, like South Korea, have sectors that are being hurt by China’s slowing economy. South Korea and Japan are engaged in a trade war of their own, making it far less likely they will join in putting concerted pressure on the Chinese. And Trump’s abdication of leadership in Asia has forced a number of countries, including major allies like Australia, to rethink their relationship with China and become more closely allied with it.
Finally, Trump has been the first one to really blink in this trade war when he postponed the implementation of the new tariffs on nearly $300 billion of Chinese goods under pressure from American businesses that feared it would impact their Christmas holiday sales, an enormous driver of profits for many US firms.
The US is a theoretical democracy that has elections in 15 months. President Xi is apparently now president for life in an autocratic state. China has shown the capacity to use extreme measures to not only control its people but also prop up its economy. Xi can use these intervening months to solidify the diplomatic and military gains he has made in Asia and wait for Trump to lose in 2020 in the pretty firm belief that a more normal relationship with the US will be restored. Yes, it is still a gamble. But it’s one the Chinese appear to be willing to take. And the worst that could happen is they are finally forced to sign a bad deal if Trump does win in 2020 and then force the US to enforce it.
For all of these reasons, there will be no deal for Trump before 2020. Yes, China will continue to negotiate and respond with hopeful words that it will meet the US halfway just hours after US Trade Representative Navarro said the US won’t meet China halfway if only to try and calm the markets. But that is just running out the clock until the election. However, Trump and the fools and sycophants that surround him apparently can’t see that.