Don’t get excited about the US-China “deal”

There’s still a lot of work to do if “one of the largest deals ever made” isn’t to turn into the biggest deception ever.

I’m not surprised Donald Trump loves Twitter so much.

These days you can’t get noticed on social media unless you describe something as supercalifragilisticexpialidocious.

You can’t just have a fun night anymore. It needs to be “the best night ever” or people on the internet won’t care.

Trump fits in well on social media because his vocabulary only seems to consist of superlatives.

The US President vows “the greatest military build-up in American history”…

The nuclear deal with Iran was “the worst deal ever”…

NAFTA was the “worst trade deal ever made”…

Flu shots are “the greatest scam in medical history”…

And the Russia probe investigating Trump’s involvement in Russian election meddling is “the single greatest witch hunt of a politician in American history”.

So when Trump called the agreement brokered with China at the G20 summit in Argentina “one of the largest deals ever made”, we might have to take it with the biggest pinch of salt.

A full-blown trade war between the US and China hurts both sides, so it’s a good thing the two superpowers are talking.

But let’s not get carried away yet when neither side could even agree on a joint statement…

Talking past each other

Let’s first take a look at the “incredible deal” that the US leader has negotiated with his Chinese counterpart.

The Washington Post sets out the terms of Trump’s grand victory:

  • In return for shelving a major escalation in tariffs on $200 billion in Chinese goods set to bite on Jan. 1, the Chinese will buy an as-yet unspecified amount of American farm, energy and industrial goods; 
  • the Chinese also pledged to crack down on fentanyl, a synthetic opioid fuelling an epidemic of American overdoses; 
  • and the Trump administration set a 90-day timer for the two sides to reach a breakthrough on a long and knotty list of US complaints about Chinese economic policy. 

Doesn’t sound too bad on paper, does it?

But in reality the deal is a lot hollower than Trump makes it out to be. In fact, agreements are usually a lot more convincing when both sides tell the same story.

The US government wants to cut its trade deficit with China in half. To bring down this imbalance from $400 billion to $200 billion per year, China will have to buy more American.

China needs to import more farm, energy and industrial goods from the US and Trump says Chinese President Xi Jinping is willing to concede on this point.

Yet China’s statement doesn’t mention anything like a pledge to purchase a “very substantial” amount of American hamburgers, sodas or Fords.

The 90-day deadline appears to have been lost in translation. The Chinese government doesn’t acknowledge a three-month time frame, or any time frame for that matter, to resolve US complaints.

Trump also claims the Chinese will “reduce and remove” tariffs on cars it imports from the US. Those tariffs currently stand at a sizeable 40%. Again, the Chinese government stays silent on this matter.

China did say it won’t stand in the way of Qualcomm purchasing NXP Semiconductors. The Chinese merger authority had previously blocked the acquisition. It’s not much of a win for the US because Qualcomm seems no longer interested.

Xi’s pledge to crack down on fentanyl seems more significant. However, this drug is produced illegally in China so it’s not very clear how effective this government crackdown will be.

At the same time, China emphasised that both parties should “work toward scrapping all tariffs”. That’s a laudable aim but the Americans didn’t state anything of the sort.

The Chinese and American version of this grandiose deal differs to such an extent that you’re left wondering whether they’re still talking about the same thing.

Powerful incentives

The markets were happy to go along with Trump’s enthusiasm after months of tensions between the US and China.

The Dow Jones, S&P 500 and Nasdaq all rose yesterday. Major European and Asian stock markets also posted solid gains.

But, in a striking resemblance to the Brexit negotiations, the US and China are speaking of a “deal” when hardly anything has been agreed.

Like the UK-EU Withdrawal Agreement, both parties merely agree to give each other more time to agree on thorny issues that still need resolving.

Says Goldman Sachs economist Alec Phillips:

“While the Xi-Trump dinner has clearly improved the tone of the US-China relationship for the time being, and we would expect an initial positive market reaction, the ‘pause’ prolongs the period of uncertainty around the eventual structure of trade relations between the two countries.

“The spectre of higher and broader US tariffs remains, and the underlying issues clouding the trade relationship are deferred to further negotiations.

“With additional time to pursue negotiations, we think the chance of a comprehensive deal that involves rollback of tariffs is … perhaps a 20 per cent probability over the next three months.”

About a month ago, I already wrote that neither the US nor China can afford a trade war.

Both countries have accumulated unprecedented levels of debt. They have also created an economic interdependence with China propping up the US economy and vice versa.

But in addition to economic pressure to strike a deal, both Trump and Xi have clear political incentives to smoke the peace pipe.

Trump is under pressure from soya bean farmers whose exports have been crippled by a 25% Chinese tariff. Soya beans are the single most valuable US farm export product.

Meanwhile car manufacturers aren’t exactly thrilled about Trump’s tariffs on steel and China’s tariffs on US cars. An escalating trade war is likely to hurt even more industries and the US economy in general.

Since Trump likes taking credit for a booming a stock market and a roaring economy, a trade war with China could seriously damage his re-election bid.

Over in China, Xi may not have to worry about getting re-elected but he does need to please his people and keep the economy going.

As US colleague Brian Maher writes:

“The Chinese economy is a skyscraper of playing cards erected upon a cracking foundation of debt… and its stock market is sunk in a bear market.

“China’s economy serves a far greater master: social stability. Millions of unemployed and resentful young men are Chinese leadership’s deepest fears. It is desperate to keep them distracted on the factory floors.”

Both the US and China have powerful incentives to keep their trade war from escalating. In this sense, a 90-day truce starting 1 January 2019 is a good start.

But there’s still a lot of work to do if “one of the largest deals ever made” isn’t to turn into the biggest deception ever.

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