China: Tariff Hikes Looming

Published on May 9, 2019
SGH Insight
Trade tensions were front and center on Friday as President Donald Trump’s increased tariffs as of 12:01 Eastern time Friday, with Beijing vowing to retaliate.

Two-day U.S.-China trade negotiators resumed Friday, but little progress has been made thus far, according to reports.
Market Validation
(Bloomberg 5/10/19)

Stocks continued their downward ways Friday following newly implemented
tariffs that marked the latest salvos in the escalating U.S.-China trade war
as talks between the two countries ended for the day.

The Dow Jones Industrial Average fell 326 points, or 1.26%, to 25,501, the S&P
500 declined 1.37% and the Nasdaq was down 1.75%.

Since President Trump’s tape bomb on Sunday threatening to hike tariffs on imports from China if trade talks between the two countries did not conclude this week to the satisfaction of the US negotiating team, all eyes have been on Beijing for what, if any, concession Vice Premier Liu He might bring as he arrives in Washington today to break the gridlock.

*** The color from the Chinese side on the eve of Liu’s arrival is not particularly encouraging, even if discounted for some tough talk negotiating. Indeed, while there could always be a breakthrough at the 11th hour in the talks that begin later today before the Trump-imposed Friday deadline — victory on a compromise/deal is always spun for the eye of the beholder — our best sense is that the atmospherics and the signals from Beijing do not indicate we are moving in that direction. ***

A few points:

** Beijing sources maintain, not surprisingly, the leaks from Washington and press accounts of China reneging on putting text into legal commitments are “without foundation,” but interestingly, have not challenged it too aggressively as far as we can tell.

** More to the point, Chinese sources say there is/was consensus in the Agreement Text on “90% of issues, with 10% outstanding” (this rough assessment has been floated about before), but add those last “10%” are related to China’s core interests, where China will not make any compromises.

** “Core interests” is not an idle term, we would add, and is used only very precisely by Beijing to characterize strategic issues such as Taiwan and the One China Policy, as well as the now rarely mentioned “Made in China 2025” technology goals.

** Regardless, one would assume that Liu is bringing something from President Xi Jinping to the table in an attempt to break the enforcement impasse…but we do not hear what that could be or is.

** Furthermore, as we noted earlier this week (see SGH 5/6/19, “China: A Highly Delicate Inflection Point”), the decision by Liu He to proceed with a meeting after Trump’s Sunday tweets was taken with a great deal of trepidation from Beijing that the current round of talks could indeed fail.

** From the US perspective, with the politics of the 2020 US Presidential elections looming large, we find it hard to imagine Trump would yet again postpone hiking tariffs on $200 billion of imports from China from 10% to 25%, as markets seem to want to believe, even if a deal is not finalized by tonight but both sides agree to keep negotiations alive.

** Perhaps most importantly, as we have stressed before, we are not sure Trump, and some of the more hard line political and policy advisers surrounding him, are entirely averse to another “shot” at China, especially as long as Trump believes he has some proverbial “house money” to play with in achieving broader strategic and political goals in a strong GDP, solid job creation, and near-record stock market levels…at least for now.

** Indeed, the narrative that the current impasse is solely attributable to China reneging on promises in the Agreement Text made earlier does not factor in the Trump administration’s own broader political and geopolitical considerations, such as, case in point, the Federal Communications Commission today banning China Mobile from access to the US markets due to charges of espionage — at the urging of the White House.

And so, our best guess at this point is that tariffs will go up tomorrow, even as the two sides decide to continue negotiations.

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