Donald Trump has a new strategy for striking a trade deal with China’s president: Hong Kong.
In a startling turn of events, the US president pivoted from two months of largely pretending giant protests weren’t afoot to urging China to “humanely” settle the situation. Trump wants Xi Jinping to do so before any US-China trade deal is reached.
There are many possible takeaways here. One: better late than never, Mr President. Trump’s reticence to defend Hong Kong’s special place in the greater China region was both disturbing and perplexing. The biggest one, though, is that the trade deal the Trump reality show previewed is not happening.
A cynical take is that Trump is setting up a strawman excuse. If China doesn’t find a peaceful way to clear the streets of Hong Kong, Trump can say that’s why he walked away. In America, we defend democracy, he can thunder – and, somehow, with a straight face.
But Trump’s bilateral trade deal with China pretty much died on August 5. On that day, the US Treasury Department labeled China a “currency manipulator” for the first time since 1994. Those, in trade circles, are fighting words. China allowing the yuan to trade above 7 to the dollar is a war-footing signal all its own.
There’s great excitement in markets about Trump’s “Christmas present” to US consumers. That’s how China-bashing advisor Peter Navarro described Trump’s sudden decision to delay the next round of tariffs – 10% on US$300 billion of goods – until December. The real intended recipient, though, is Wall Street traders racking up “sell” tickets.
Trump’s decision to tie his performance to the stock market is fast going awry. A real gift would be to scrap the new taxes to coax Xi back to the negotiating table. A mere delay in trade pain to come doesn’t buy you much goodwill in Beijing or confidence among Dow Jones Industrial Average investors.
Obviously, Trump wants to avoid a stock crash as the 2020 election approaches.
But November 2020 considerations color where Trump takes his trade war. After wearing his “Mr Dealmaker” costume all this time, says Arthur Kroeber of Gavekal Research, Trump thinks “donning his ‘Mr Tough Guy’ garb” will buttress re-election hopes. Xi is likely to keep wearing his battle wardrobe, too.
So, expect more confrontation. One theater is central bank policy. After browbeating the Federal Reserve to ease last month, Trump is angling for another cut. Not the wisest strategy, perhaps.
One reason stocks are sliding is a bond market flashing red. The inversion of the so-called yield curve – 10-year yields falling below those of short-dated securities – presaged the last seven recessions. As this dynamic returns, punters are in a near panic.
Amid such turbulence, mean tweeting about the Fed is hardly wise. The US central bank, after all, is the protector of the reserve currency and US Treasuries, the linchpin asset of global finance.
Save Vladimir Putin or Kim Jong Un, anything that hurts the Fed’s credibility is in no one’s best interest. Least of all Xi, whose government owns the biggest store of US Treasury securities – roughly US$1.2 trillion worth.
What of Trump roping Hong Kong into the mix? How this goes is anyone’s guess.
Some world leaders make the mistake of believing their own press. Others, the books that bear their name. Such is the case with Trump and his The Art of the Deal memoir. Thirty-two years after he graced bestseller lists, he’s trying to keep this transactive reputation alive.
It’s easier said than done, as China runs circles around Trump’s trade negotiating team.
In truth, Trump the politician has been all deal-breaking and primal grievance. The suave broker of pacts large and small seemed to stay at Trump Tower in New York. And this, in a nutshell, is another reason why optimism that Trump is winding down his trade war is wishful thinking.
Xi is no easy mark
Hubris is marring Trump’s domestic agenda. Take the gun control debate raging anew following mass shootings in Texas, Ohio and elsewhere. Trump’s plan for progress: tying gun legislation to immigration. For decades, these have been the two most intractable issues in Washington. Trump thinks he possesses the magic to do both at once.
This provides a glimpse into what Trump is thinking with China and Hong Kong. Xi hasn’t been the easy mark Trump expected. Nor have Hong Kong’s 7.4 million people been as pliable as Xi’s Communist Party assumed. Yet here, too, Trump’s hubris appears to know no bounds.
Hong Kong is quickly morphing into Xi’s biggest geopolitical challenge yet. Letting the protests fester and grow could make him look weak in the halls of Beijing power – or have mainland dissidents thinking they, too, can demand change.
A crackdown, though, would be carried live on BBC and CNN, wrecking the image China worked to buttress since Tiananmen Square 30 years ago.
Until Thursday, Trump had largely looked the other way. When he did wade into the controversy earlier this month, Trump called the protests “riots,” adopting Beijing’s talking points. He also called the matter “between Hong Kong and China,” a suggestion that the US would butt out.
Now, Trump says via a tweet that “China is not our problem, though Hong Kong is not helping.” He said that a “personal meeting” with Xi could be just the thing to solve the crisis. Presumably, Trump is betting his art-of-the-deal skills will win the day. But investors should keep those seatbelts buckled for fresh turmoil to come.