If you were China, would you rather face a deadline for trade negotiations with President Trump now, or a few months from now?
It’s an easy question to answer. Trump is in the waning days of Republican control of Congress. The ability to pass laws with no support from opposition Democrats—which is how the Trump tax cuts passed in 2017—will end within a month.
Beginning in January, Trump will have to contend with Democrats who control the House of Representatives and can investigate any Trump controversy they choose. Even Republicans in the Senate are talking about passing new limits on Trump’s ability to impose tariffs and interfere with trade.
Special counsel Robert Mueller, meanwhile, may be close to completing his investigation into Russian interference in the 2016 U.S. elections, which portends more indictments of Trump confidantes and more politically damaging revelations. On top of that, the U.S. economy seems to be slowing, making it more vulnerable to tariffs and other protectionist measures Trump favors.
Trump’s domestic constraints may benefit China
So the 90-day “truce” in Trump’s trade dispute with China will push negotiations into a new time window in which Trump will no longer enjoy unified Republican control of Congress, and may suffer political damage as the Mueller investigate culminates. Chinese president Xi Jinping, who doesn’t have to run for reelection ever, faces no such constraints. The truce may also reveal Trump’s reluctance to escalate the dispute because of harm it would cause to the U.S. stock market, which Trump regards as a report card of sorts grading how he’s doing in office.
Trump has imposed tariffs of 10% (in most cases) on about $250 billion worth of Chinese imports to the United States. That’s about half of everything China sells to Americans. He threatened to raise that tariff to 25% on Jan. 1, and if that didn’t produce the concessions Trump demands, to slap tariffs on all the other products imported from China.
After meeting with Chinese president Xi Jinping in Buenos Aires on Dec. 1, Trump postponed the escalation to 25% tariffs until March 1. If the two sides make a deal before then, the tariffs won’t rise and Trump could rescind the tariffs already in place. China, for its part, will reportedly roll back retaliatory tariffs on cars imported from the United States, and start buying American farm products it has essentially blackballed. These minor concessions cheered financial markets, with stocks rising on the outcome in Buenos Aries.
But the good cheer might be fleeting. Each side characterized the G20 agreement differently, with China publicly promising much less than Trump claimed they had agreed to. That suggests less of a breakthrough than markets may be celebrating. And many analysts think an escalating trade war is inevitable, given intractable positions on both sides. “We remain skeptical of a substantial trade deal between the two economic giants,” economist Greg Daco of Oxford Economics wrote after the Buenos Aires meeting. “We believe the odds of further escalation in early 2019 are high.”
That may be OK with China. Trump wants China to stop stealing U.S. technology, open its economy to more American products and abide by advanced-nation rules instead of claiming special protections as a developing economy. Those are legitimate demands other presidents have made. Yet while China may pay lip service to such reforms, many analysts think it’s unlikely China will abandon an economic model it has followed for decades and based its future on.
Investors’ concerns
Trump thinks his leverage comes from the threat of additional tariffs, which would, in fact, hurt the Chinese economy. But they’d also hurt the American economy, and Trump may have reached the limit of how much protectionism American companies can absorb. Stocks have yo-yo’d this year, despite strong economic growth and corporate tax cuts that sent profits soaring. Trump’s protectionism is one of investors’ biggest concerns, which is why stocks rose handsomely on the news of a temporary truce.
But stocks may grow more sensitive to tariffs, not less, as the economy slows. Growth peaked in the second quarter of 2018 at a 4.2% annualized rate, then dropped to 3.5% in the third quarter. Growth in the fourth quarter is just 2.8%, according to the Atlanta Federal Reserve’s estimating tool. Moody’s Analytics forecasts growth of 2.9% for 2019 and just 0.9% in 2020. Anything harming profits, such as tariffs, will have a more pronounced effect on stock prices if investors grow gloomier about future prospects.
This outlook might be too pessimistic, and it’s possible Trump might really be able to compel meaningful reforms in China. The Trump tariffs are hurting China, creating an incentive for Xi to find a way for Trump to declare victory. “This is an enormous event,” White House economist Larry Kudlow told reporters two days after the Buenos Aries meeting. “They put stuff on the table we have not seen before. That bolsters my optimism.”
But even Kudlow acknowledged that it’s actions that matter, not vague commitments. And it’s in China’s interest to keep talking, since the longer they stall, the better the deal they’re likely to get.
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Rick Newman is the author of four books, including “Rebounders: How Winners Pivot from Setback to Success.” Follow him on Twitter: @rickjnewman