Sorry, everyone, it is time to put the cork back in the bubbly and return your “I survived the trade war and all I got for it was this lousy T-shirt” top to the US Trade Representative Office or your nearest Chinese embassy. It turns out that you should not be as optimistic over last week’s major announcement of the world’s two largest economies reaching the first phase of a comprehensive trade deal. Not even a week later, and there are already hiccups in negotiations.
Going Through a Phase
The news broke late on Friday, Oct. 11, that Washington and Beijing agreed in principle to a so-called first phase of a trade agreement. Following 18 months and 13 rounds of on-and-off talks, the two sides finally squeaked out a sort of early harvest. As part of the initial phase, China would buy up to $50 billion in US agriculture, open its domestic markets to American financial services firms, and address America’s intellectual property concerns. In exchange, the United States will delay the Oct. 15 tariff hikes. It will be written in the coming weeks and expected to be signed in Chile in the middle of next month during the Asia-Pacific Economic Cooperation meeting.
Wait a minute. Don’t pick up that pen just yet.
After finishing Friday’s session more than 300 points higher, the Dow Jones Industrial Average closed 23 points lower on Monday, Oct. 14. Apparently, investors were not pleased by reports that Chinese officials are requesting another round of negotiations before signing the “very substantial phase one deal.” It is unclear if further talks will occur in Washington or Beijing, or if they will even happen at all.
Since the White House press event, Chinese state media have been more cautious, warning the United States to “avoid backpedaling” on the partial trade deal. China Daily, the official state-owned English newspaper, opined:
“As based on its past practice, there is always the possibility that Washington may decide to cancel the deal if it thinks that doing so will better serve its interests.
“The US should avoid backpedaling, as it has in the past, and instead cherish what has been achieved as a manifestation of a healthy and steady China-US relationship that serves the interests of both countries and the world.”
Markets were further spooked when Treasury Secretary Steven Mnuchin revealed that the Dec. 15 round of tariffs will likely go into effect if no deal is reached between the nations. These levies would cover nearly all US-China trade, which would inevitably place greater pressure on the global economy. That said, he does believe they will close the books on the first phase by then.
The debate right now is who is enduring the most amount of pain. The latest Chinese customs data found that total September imports dropped 8.5%, higher than market forecasts of 5.2%. September exports, meanwhile, dropped 3.2%, slightly more than the 3% analysts had penciled in.
Does this mean China is doing worse than the US economy? Not quite, says Weijian Shan, Chinese financier and CEO of Asian private equity giant PAG. Writing in an op-ed titled “The Unwinnable Trade War,” Shan noted that damage to the US economy is greater than that to China, at least in percentage terms:
“The tariffs did not compel Chinese exporters to reduce their prices; instead, the full cost of the tariffs hit American consumers.
“It actually lowered duties for those US products that can’t be bought elsewhere more cheaply, such as semiconductors and pharmaceuticals. Consequently, China’s import prices for the same products have dropped overall, in spite of higher tariffs on US imports.”
Art Hogan, chief market strategist at National Securities, got it right: “It’s going to be a bumpy road.”
Make Trade Great Again
Is this the end of the beginning of a beautiful friendship? If you’re an importer-exporter a la Art Vandelay, you own shares on the New York Stock Exchange, or you enjoy Walmart’s rollback savings, then you better hope that the administration and Xi Jinping’s men can make trade great again. This is the only way we can finally crack open the bubbly, wear our T-shirts, and get the Dow Jones up 10,000 points.