We Reiterate — Expectations Are Too High For China Trade Deal
Author: Greg Valliere
March 20, 2019
WE CAUTIONED LAST WEEK that U.S.-China trade talks aren’t close to resolution, and we still think that’s the case, as several stumbling blocks could push the negotiations well into the spring. This comes as anxiety grows over the impact of tariffs — U.S. automakers, Japanese economists, the Federal Reserve, and firms like Federal Express are all squirming.
A MODEST AGREEMENT IS STILL LIKELY in a couple of months, but the risks are downside risks. A U.S. delegation will travel to Beijing next week, with Chinese officials scheduled to visit the U.S. in early April, amid reports of friction over lifting existing tariffs, patent protection, intellectual property rights, and the most nagging issue of all — establishment of an enforcement mechanism with teeth.
CHINA WILL PLEDGE TO BUY vastly more U.S. goods, especially from the reeling American agricultural sector. President Trump needs to tout something that’s easier to spin than intellectual property, and he’ll get a dramatic boost in U.S. exports — but the tariff war is already taking a serious toll that will persist into the summer or longer. The drag on GDP growth — and the continued uncertainty for corporations — is a threat to Trump’s re-election, and he knows it.
FEDERAL EXPRESS reported weak earnings yesterday, and said some of the blame is attributable to tariffs. The U.S. auto industry is reeling over steel and aluminum tariffs, and the Japanese government downgraded its economic prospects overnight, citing the impact of tariff wars. This economic headwind will keep the Federal Reserve dovish, as Chairman Jerome Powell is likely to indicate in his press conference today.
NOWHERE ARE THE STAKES HIGHER FOR TRUMP than in Ohio, so today he will visit a thriving military vehicle factory in Lima that makes tanks and combat vehicles. But he faces a growing backlash in the state over the closing of a GM plant in Lordstown, thanks in part to disastrous tariffs on steel and aluminum, which analysts believe have cost GM and Ford about $1 billion each. His weekend tweetstorm against GM and others probably won’t help Trump in Ohio, where he will rake in millions at a GOP fundraiser tonight.
POLLS IN OHIO SHOW TRUMP’S SUPPORT HAS SLIPPED, although if forced to bet we would wager that he will win the state’s 18 electoral votes (but he’s now the early underdog in Michigan, Pennsylvania and Wisconsin). And there’s still a threat that Trump may impose tariffs on foreign automakers, even though most of them have ramped up their production in the U.S.
BOTTOM LINE: The good news is that a protracted trade war between the U.S. and China is unlikely, and reforms are coming. And we wouldn’t say that the negotiations with China are in trouble; they’re in a typically tense end-stage. But the markets got ahead of themselves in recent weeks, expecting a glitzy announcement at Mar-a-Lago by the end of March.
CHINA WON’T PARTICIPATE IN A SIGNING CEREMONY until a deal is completely done; there will be no repeat of the Kim Jong-Un fiasco. So there’s still a long slog ahead, which could provoke this famously impatient and unpredictable U.S. president to ratchet up the rhetorical pressure on China — still another downside risk between now and late spring.
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