The most interesting thing about the trade détente that U.S. President Donald Trump and Chinese President Xi Jinping just reached in Buenos Aires wasn’t what was in the actual deal.
The deal itself was exactly in line with what I—and a majority of market participants—predicted: It was more of a plan to come up with a plan than a notable deal in and of itself. While there remains considerable uncertainty about the trade war with China and U.S. trade policy, Washington’s and Beijing’s decision not to escalate tensions at the G20 meetings may reveal something about their incentives.
What’s in the deal
The deal itself includes the following measures:1
- China to increase imports of agricultural goods, energy, and industrial products
- China to deem fentanyl—used in the manufacturing of opioids—a controlled substance and restrict its production and export to the United States
- China to reconsider previously blocking the Qualcomm-NXP deal
- U.S. tariffs on $200 billion of Chinese goods to remain at 10% rather than rising to 25% on January 1, 2019, and new tariffs won’t be imposed on $267 billion of goods at this stage
- The agreement sets a 90-day clock, starting January 1, 2019, for talks to address “structural changes with respect to forced technology transfer, non-tariff barriers, cyber intrusions and cyber theft, services, and agriculture”1
- Without progress in the talks, the tariffs on $200 billion of goods will escalate from 10% to 25% after 90 days
What do we make of it?
At least both parties are talking to each other—there was an opportunity for the trade war to escalate this past weekend and neither side took it. Both countries managed to ‘save face’ and climb down while holding their red lines firm. That’s the good news.
However, the deal is short on details. China agreed to buy more goods from the United States last May, which didn’t materialize,2 so that could happen again. Even if China does buy a bit more stuff from the United States, it’s unlikely to materially move the dial on the bilateral trade balance between the two countries. Furthermore, the Qualcomm-NXP deal appears to be off the table now regardless of how China feels about blocking it.
Most important, the deal struck does not get at the heart of the conflict: Both the United States and China want to be the largest global economy, and plan to use excellence in machine learning, artificial intelligence and quantum computing to get there. This conflict between Washington and Beijing has been going on in earnest for at least eight months. It’s highly unlikely the two sides will find agreement on structural issues such as intellectual property rights, forced technology transfers and cyber security in just 90 days.
Where do we go from here?
While the markets have expressed relief at the temporary détente, I’d wait to bring out the ticker tape. First, this reprieve in the trade war may not last 90 days. Last time the United States struck a deal with China, in May 2018, President Trump announced new tariffs less than two weeks later. To be fair, the president hadn’t brokered the May deal himself—U.S. Commerce Secretary Wilbur Ross did—and so the president may have more of an incentive to stick to what was signed on paper this time around. Even if the cease-fire does hold for 90 days, there are a number of other ways for Washington to ratchet up pressure on Beijing. Investment restrictions, export controls, and limits on visas for Chinese students and workers in fields crucial to U.S. national security (read: tech) may be imposed. Either way, I think it’s more likely we get an escalation in trade tensions with China than a de-escalation from here.
Unrelated trade measures that could still unnerve markets
There’re also a number of trade measures the U.S. administration could pursue that have nothing to do with China, but could roil the markets nevertheless. First, President Trump has said that he intends to formally notify Canada and Mexico of his intention to withdraw from NAFTA, the North American Free Trade Agreement. This would increase the pressure on Congress to pass NAFTA’s replacement, USMCA, the United States-Mexico-Canada Agreement. Some House Democrats have complained that USMCA doesn’t address labor and environmental goals to their satisfaction and so have wavered in their support. If the president tries to unilaterally withdraw the United States from NAFTA, there may be a legal battle as it remains unclear whether the president can act on his own. If USMCA doesn’t pass in Congress, and the United States withdraws from NAFTA, then the United States and Canada would revert to the free trade agreement they had predating NAFTA.
The administration could also follow through on threats to impose tariffs on cars and car parts from the European Union. Such tariffs would push up auto prices for U.S. consumers and could provide a significant drag on the German economy in particular.
While I remain skeptical of the deal that was struck in Buenos Aires, it does reveal one thing about the United States and China—it seems neither country is hurting enough from the trade war to have made any meaningful concessions in the negotiations. The deal also confirms my long-held notion that the U.S. administration will only reverse course on its trade policy toward China when one of two things happens: the economy slows noticeably because of trade, or the markets fall significantly and sustainably because of trade. We’re no longer in the same buoyant economic or capital market environment that we enjoyed earlier this year when threats of tariffs against China were first made. In my view, negative press about the domestic impact of the trade war—particularly on soy farmers, who have complained of produce rotting in the fields—and weak markets in recent months may be putting enough pressure on the administration to consider starting to look for some potential off-ramps for a trade war with China.
1 “Statement from the Press Secretary Regarding the President’s Working Dinner with China,” whitehouse.gov, 12/1/18. 2 “With tariffs, Trump starts unraveling a quarter-century of U.S.-China economic ties,” The Washington Post, 6/15/18. 3 “Trump’s new NAFTA faces uphill battle in Congress,” The Hill, 12/1/18.