Commerce Secretary Wilbur Ross is confident the US will sign the first stage of a trade deal with China but there remain doubts a longer-term, substantive pact will be agreed upon soon.
Ross is already talking about locations for Xi Jinping and Donald Trump to sign the initial agreement and has even suggested that licenses are coming shortly for American companies to sell components to Chinese telecom giant Huawei.
But Xi’s government is effectively throwing in the towel on a long-term pact with the US president. In September, Xi reportedly told Japanese officials he can’t trust the “Art of the Deal” White House. Since then, Beijing has made clear it prefers to roll the dice on Trump losing the 2020 election than to make a bad deal.
Of course, the breakdown in progress toward a comprehensive pact was inevitable. Trump’s impulsivity and erratic policies make him a dreadful negotiating counterpart.
Trump will be shocked, though, to learn China won’t bow to his White House. As impeachment risks throw his administration off-balance, Trump is betting his re-election on bringing Asia’s biggest economy to heel. He and hawkish China advisor Peter Navarro sought to shift the advantage decidedly in Washington’s favor.
Hardly. Once it dawns on him that Xi won’t budge, Trump will almost surely double-down. The last thing he’ll risk is appearing weak in the China clash that Trump promised his base ahead of the 2016 election. What’s more, he genuinely still thinks he can still pressure Xi to make a deal.
Yet the odds now favor Trump restoring tariffs he’s agreed to delay in recent weeks. That includes hiking taxes on $250 billion to 30%. It means Trump might tax all Chinese goods entering the US, or more than $500 billion. The White House may expand its “entity list” of mainland companies from which US ones are banned from doing business.
Here, Trump’s pent-up anger may get the better of him. He thought a preliminary trade deal with Japan would garner banner headlines and cheer his base. Instead, it made nary a ripple in the press or markets.
As Xi plays hardball, Trump may turn his sights to Japan again. The agreement he signed with Prime Minister Shinzo Abe left aside the question of 25% taxes on imports of cars and auto parts. Odds are rising that Trump will do just that, upending Asian supply chains.
Ditto for a weaker dollar. As his political peril increases, Trump’s legislative prospects are disappearing. This lack of latitude collides with a US economy failing to reach the 5% to 6% growth Trump promised.
The US produced just 1.9% in the third quarter. As he seeks to regain the momentum, Trump may follow through on threats to devalue the dollar. He often claims a strong exchange rate is “killing” the US job market.
Trump has been browbeating the Federal Reserve to slash interest rates. The Fed’s three rate cuts this year are capping the dollar. At any moment, Trump might direct US Treasury Secretary Steven Mnuchin to take steps to drive down the exchange rate.
That would reverberate through Asia, hitting export-driven economies from South Korea to Singapore. It would undermine confidence in US Treasury debt, the linchpin asset of the global financial system. China and Japan, remember, own a combined $2.3 trillion of the stuff.
And then there’s the “wag the dog” risk. Arguably, the top tick of Trump’s tumultuous presidency was in April 2017 when he fired 59 Tomahawk missiles at Syria. It won him broad acclaim, even from political foes.
Trump may seek to relive that high as scandals mount and his popularity wanes. Might he make good on threats to take out Iran’s nuclear capabilities? Or might the US intervene militarily in Venezuela?
Meantime, Trump’s detente efforts toward Pyongyang are fast going awry. For all Trump’s claims that he and Kim Jong Un fell in “love,” North Korea is testing missiles with increasing frequency. Once Trump realizes he’s being played for a chump, he may revert to the “fire and fury” rhetoric of 2017. Threats of military conflict in Asia are the last thing markets need.
Asia should brace for the worst. As scandals mount and investigations swirl, there’s no telling what a caged and paranoid US leader desperate to change the narrative might do. Trump is almost sure to see hitting China even harder, and the rest of Asia, as the quickest way to delight his nationalist base.
Trump is likely to escalate today’s cold trade war into a hot one that puts the global economy in harm’s way. As Xi steps away from a deal, we’ll find out just how far the Trump White House might go to save face.