China: The Eagle Has Landed

Published on January 15, 2020

As has been telegraphed for over two months now, with the real breakthrough having come in October, US President Donald Trump and Vice Premier Liu He of China will finally sign “phase-one” of a new trade agreement at the White House around 11:30 today (see SGH 10/11/19, “China: Sealing the Trade “Mini-Truce”).

The event will be accompanied by pomp, cheered on by administration officials blanketing the airwaves, and covered by a media blow by blow designed to highlight this historic moment, and in the process delight twitter and algo-junkies with every up and down headline.

A Small Game of Protocol

Incidentally, the eagerness by Trump to have a White House signing with the lower ranked Liu, as opposed to a signing summit in Beijing with China’s President Xi Jinping before the Chinese Lunar New Year, as Beijing had wanted, is being spun internally in China as evidence of how badly Trump wanted, and rushed, to sign a deal. The White House will see Liu’s willingness to board a flight to Washington in a different light.

On to a more substantive note, and looking ahead:

A Real Deal

** Getting Beijing after two years of threats, tariff hikes, and negotiations to agree to an additional $200 billion of imports from the United States is without question a substantial victory for the administration of Donald Trump, even with the details, on a more granular level, still murky.

** Lost in the months of back and forth, the White House will point to the fact that it got Beijing to this point with only limited concessions on tariffs, cancelling a threat to hike rates on another $250 billion tranche of products in December, and only cutting in half a $120 billion tranche tariff schedule already put in place last September, from 15% to 7.5%. The 25% tariff regime on an original $250 billion of imported Chinese items, of course, remains in place.

** Furthermore, analysts trying to flag the very real, and reasonable risk that the supremely ambitious Chinese promises may never quite materialize will need to wait for a while for such evidence to materialize. Chinese officials have less than zero incentive to rain on this de-escalation in the trade dispute that has damaged its domestic economy, if anything, far more than that of the US, and will continue to show signs of good will and progress on delivering results — at least for now – as they did with daily leaks on purchase orders, tariff waivers, and so on throughout November and December.

** To wit, in the words of a very senior Chinese official directly involved in the negotiations, “the signing of the phase one agreement means that China and the US will suspend the trade war and resume normal bilateral economic and trade relations. The two sides will announce the resumption of the Sino-US Strategic Economic Dialogue [NB – we suspect the “SED” may get a new, Trump era title]. Both sides will also release the text of the phase one economic and trade agreement to the public at the same time in the next few days.”

** At a minimum, the source continues, “I am confident that, at least in the first half of 2020, Sino-US economic relations will maintain [a] normal [course], there will be no major trade frictions, and the possibility of resuming a trade war is zero,” [our emphasis added].

But Watch the Language

** That said, beneath the public comments, we would look for the exact language of the final text to see if the Chinese promises are characterized as “commitments,” or “targets.” While often used interchangeably, the two phrases do not have the precise same meaning, with the latter clearly denoting more room in an “aspirational” sense (the Bank of Japan, for example, has a 2% inflation target – not to be glib here). And we could not help but notice that National Economic Council Director Larry Kudlow, in an interview on Monday, referred to these “pledges” as “targets.” Perhaps we are being a bit paranoid…

** The response, however, to any such semantic issue, if there is one at all, will be to emphasize that while attaining the admittedly ambitious, promised goals may seem an enormously steep hill to climb, a doubling in Chinese imports from $188 billion by $200 billion is “doable,” given that China’s total import demand most recently stood at a whopping $1.8 trillion per year – just not much of it came from the United States. We would nevertheless keep an eye on the exact language used to characterize China’s purchase “commitments.”

Phase Two, and Further Rollbacks

** The possibility that tariffs, namely the existing 7.5% on $120 billion and 25% on $250 billion, are also rolled back further down the road excited markets over the weekend after such a suggestion was floated by a Chinese publication. While we believe future rollbacks have been dangled as a soft incentive to Beijing, it has been with no schedule or plan specifically attached – the phase one accord was hard enough to reach as it was. Indeed, Treasury Secretary Steve Mnuchin all but confirmed today that any further relief would likely only come in the now hoped for, stage two.

** Regarding stage two, the White House is already managing expectations as to how quickly those negotiations can be started, and Trump himself has shrugged them off as a battle he may wish to leave, or hold out for, until a second term. But senior Chinese officials believe that Trump is eager to start phase two negotiations as soon as possible, with an eye on February.

** Chinese officials, from what we understand, have “no doubt” that Trump is in fact seeking a comprehensive trade agreement to be signed in October, before the 2020 presidential elections.

** However, and perhaps disingenuously, other senior Chinese sources, not involved in negotiations, note that “trade talks for a phase two will be bumpier in a US election year, given the complexity of issues like intellectual property rights, industrial policies and the fact that the US frequently goes back on its words (their words, not ours)! I do not think the two sides can sign a phase two deal in October.”

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