US and trade sensitive global markets continued to rally overnight and today on reports that US Treasury Secretary Steven Mnuchin has reached out to his negotiating counterpart, Vice Premier Liu He, to suggest a new round of trade discussions with Beijing. There has been no official response of any substance from Beijing as of yet beyond the simple confirmation that the communications have indeed taken place, and a welcoming of renewed dialogue as Beijing’s preferred route for resolution of the trade conflict with the US.
But we have in the interim received the following initial color and reaction from senior Chinese policy sources:
*** No time or venue has been publicly proposed by their US Treasury counterparts, who have taken the lead on the initiative, but from what we understand Mnuchin expressed a desire to hold meetings in Washington DC, within the month (September). The two sides had as of this morning yet to have discussed this next round of talks in much greater detail.
*** Beijing will very likely take the opening for discussions but remains wary and positioned defensively, as phrased tellingly by sources, that “whatever the true intentions of the Trump administration, Beijing welcomes the dialogue, and would be ready to make appropriate concessions as long as Trump abandons his confrontation of China over its core interests.”
*** Ultimately, these officials predict that exactly for that reason, because it is “absolutely impossible” for China to compromise on its core interests with the US, President Trump is still more likely than not to slap tariffs, as threatened, on the next tranche of $200 billion of imports from China.
But that is not to make a point for simply dismissing this latest outreach outright – even a mutual desire to de-escalate, as appears clear at this point, is a positive development, and the potential for a more limited, interim type agreement should not be dismissed under these circumstances. That path is tenuous indeed, and we expect both sides to actively manage down public expectations in weeks ahead.
Precisely to that point, while there should by all counts be a united front from Washington, we believe there remains a significant counter-weight within the Trump administration, even if holding their tongues for now, to the proponents of dialogue over no dialogue at this time with China.
These see the benefits of following through with the pressure of the next round of tariffs to outweigh an incomplete, short term truce that would let Beijing “off the hook” on the more intractable issues at hand – especially just when it is clear that US pressure is starting to bite for real. No deal, they will say, is better than a weak deal, especially when the US appears to have a hard fought, upper negotiating hand.
Indeed, in confirming today that apparently – an interesting choice of words – Mnuchin has reached out for talks, National Economic Director Larry Kudlow even if unwittingly confirmed that this initiative has been cobbled through on a very ad hoc basis.
And in deferring to Mnuchin as the lead on the talks, deliberately or not, Kudlow furthermore maintained a modicum of distance between his own position and Mnuchin’s outreach, even though his leanings certainly lie far closer to Mnuchin’s than to the more hard line members of the Trump economic team – US Trade Representative Robert Lighthizer, Special Trade Advisor to the President Peter Navarro, and also, we would add, Commerce Secretary Wilbur Ross.
Finally, lest the point be lost, President Trump’s tweet today downplaying any urgency from the US side to strike a deal further confirms the tenuous and as of yet still purely exploratory nature of this outreach. But perhaps more importantly, beyond negotiating bluster, it also reflects the likelihood that the Trump trade and strategic push back against China is substantive enough economically, strategically, and politically to extend well beyond this round of talks, the November midterms, and through the tenure of the Trump presidency.