Trade Talk Update - China's Slowly Getting What It Wants

So-called Narrow Deal Is A Huge Win For China

Lately, it seems the best way to manufacture a market rally is for someone to make a positive statement concerning progress in the trade talks. While this has become a bit repetitive it still has not lost its magic. The trade talks started in early 2017 and have dragged on with promises of a deal always around the corner. Always nearing completion but such announcements time and time again have proven premature. This is an update and an appraisal of what we might expect considering the direction in which both countries seem to be moving. Remember nothing is yet carved in stone after the latest "positive statements" were made.

Two very different views exist as to the road ahead. The first is Trump always escalates when put under pressure and will raise tariffs if the Chinese fail to fall in line. Those in this camp feel that if China thinks Trump is going to crumble now just because he faces possible impeachment, they are in for a nasty surprise. The second is Trump will fold like a cheap umbrella to keep the stock market up. A good number of people hold the opinion Trump values the false image of victory and being reelected far more than the overall long-term health of the nation.

With Washington embroiled in impeachment talk do not expect China to rush towards cementing a deal anytime soon. For China to agree to anything it will have to be strongly tilted in their favor. The dance between the United States and China continues with both sides spinning their narrative of what is occurring. As each little news blip emerges the markets swing back and forth. Optimism quickly fades each time either party threatens to retaliate against the other or expand the scope of what they see as an attack on their economy and standing in the world.

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Critics of America's existing trade policy say trade deals over the years have failed to deliver on what they promised. Instead, they have added to environmental problems across the world and exacerbated economic inequality within many economies as manufacturing jobs have been outsourced to low-wage countries. Some activists also claim these deals can curb freedom of speech on the internet and other detractors say it incentivizes currency manipulation. Viewing the global economy we should consider that much of the "free trade" movement has been fueled by mega-companies desire for larger markets and greed. The desire of big business to both develop and control future rules has caused them to lobby governments into giving up control and becoming subservient to corporate “efficiency.”

It would be fair to say that not everyone is a fan of Trump's trade war strategy of confronting countries that the United States suffers a trade deficit with and forcing concessions from them. This includes many of America's mega-companies that moved production overseas years ago to exploit cheap labor. Several of these mega-companies oppose any policy that will that harm their profits. Because of this they and their lobbyists have mounted a well-funded propaganda campaign against the trade talks based on the idea consumers will be forced to pay higher prices. This means a big group of Americans blame Trump's trade policies for rising prices which they say hurt the poor.

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So far the trade talks with China have been a dismal failure. It is important to remember negotiators have not been talking for weeks or months but years. In early April of 2017, China's Xi visited Trump’s Mar-a-Lago estate in Florida, where they agreed to set up a 100 Day Action Plan to resolve trade differences. Unfortunately, little progress has been made in getting China to make long-term concessions in the important issues that give China unfair advantages in trade. A good source or timetable detailing trade talk progress, or lack of it, can be found on China Briefing published by Dezan Shira & Associates. Their web page; "The US-China Trade War; A Timeline" is continually updated as new developments occur.

With Trump being the most anti-trade President in history for China this has become a waiting game with time on their side. I am not alone in recognizing China's reliance on an age-old and tested Asian negotiation technique, call it a tactic or style if you like, but it is deeply rooted in wearing down your opponent over time. By time I mean years and sometimes even decades. This can be done in many ways such as demanding minor changes and constantly renegotiating matters that have already been agreed upon.

It is naive to think a unified China will not continue to exploit the advantages a state-driven economy has over free enterprise. With an expanding military armed with a slew of modern cutting-edge weapons produced at home its predatory economic system views a divided America as easy pickings. China is a state-run economy based on a business model that is geared to expand by crushing the competition. Subsidizing those companies working within its system in a multitude of ways helps it achieve this goal. Countries that export goods at slightly below cost in exchange for manufacturing jobs are not stupid they are predatory and we in America are their prey.

While exports to Canada and Mexico rose in June which some people view as a sign that Trump's tough talk is working with America's two big North American trading partners. The U.S. trade deficit with China is up more than 6% this year which indicates a huge failure on the part of America to stand firm and put some real hurt on China. It is silly to think China returning to trade talks will result in anything substantial or a quick resolution to current issues. China has little intention of altering its course and will concede nothing in future trade talks.  Any agreement conflicts with the goal of the Chinese Communist Party (CCP) to turn China into a “manufacturing superpower” so advanced in tech manufacturing that it dominates global high-tech markets.

At times China has even taken up the role of being the injured party and threatened to retaliate after the Trump administration expanded its trade blacklist to 20 Chinese public security bureaus and eight of the country's top technology firms over alleged human rights violations against Muslim minorities. This includes imposing tariffs on American products. Beijing has also mounted its own offensive aimed at the American economy and causing a political fiasco for Trump that could affect next year’s U.S. presidential elections. The Chinese Communist Party (CCP) has gone public with a strategy of “creating an enemy for itself” and the U.S. economy is the main target.

This is all being played out before a backdrop of a global economic downturn. This coupled with the  escalating trade war has prompted the World Trade Organization (WTO) to reduce its global growth forecasts for 2019 and 2020. This means world merchandise trade volumes are expected to only expand by 1.2% in 2019, which is substantially slower than the 2.6% growth forecast in April. They also see 2020 global growth slowing to 2.7%, down from 3% previously predicted.

Back to what appears to be the deal on the table. What is now being presented includes no commitments on reforming Chinese industrial policy or the government subsidies that have been the target of longstanding U.S. complaints. Given China's insistence that structural reforms remain "off the table" a so-called narrow deal, with punitive tariffs eliminated in return for greater Chinese purchases of soybeans and LNG amounts to a total victory for Beijing. Given China needs both these products they are by far the big winners in these talks.


Footnote;  Trade policies have massive long-term ramifications on the strength of a nation's economy. How these policies develop and take shape are generally the result of many factors coming together and not always well planned.  The article below explores these issues.
 https://brucewilds.blogspot.com/2019/05/fair-trade-remains-key-global-economic.html