It is clearly in the self interest of both President Donald Trump and President Xi Jinping to reach an agreement that would bring the U.S.-China trade war to an end.
In the long-run.
That same calculus, however, argues that in the short run both leaders will let the current round of talks fail.
The long-run math is extremely compelling.
On the U.S. side President Trump will run for re-election in 2020. He would like to go into that election with as strong an economy as possible. And it is essential that farmers who depend on exports vote for him. Without those electoral college votes from the MidWest Trump’s chances of winning in 2020 go way down. Maybe to zero. The U.S. economy is already looking to slow down in the second half of 2019. A drop of another half a percentage point in economic growth because of a U.S.-China trade war from an economy that might be running at just a 2.2% annualized growth rate then is not the economic record that the President would like to be running on. Even if you assume–as I think the White House does– another 25 basis point cut in interest rates from the Federal Reserve in late 2019, the negative effects of a tariff war with China move the margins on economic growth into potentially negative and dangerous territory for the U.S. President.
On the Chinese side, the economic picture facing President Xi are just as perilous. For example, Chinese companies defaulted on 39.2 billion yuan ($5.8 billion) of domestic bonds in the first four months of the year. That’s almost 3.5 times the total for the first four months of 2018, according to Bloomberg. This trend puts defaults on a pace for a new record, beating that set in 2018. The People’s Bank can, of course, fight that trend by putting more cash into the financial system, but that would mean abandoning the long-standing goal of reigning in speculative lending and tightening rules for the non-banking lending sector. This comes as GDP growth in China fell to just 6.6% in 2018, the lowest annual growth rate since 1990. Growth in the fourth quarter was just 6.4%. And it’s clear from the most recent figures on exports that the tariff war is hurting Chinese exports. In February China’s exports fell the most in three years. Exports bounced back in March, rising 14.2% year over year, but that may reflect orders placed as a hedge against an end to the tariff truce between the two countries.
So if you’re looking out long-term, say a year (yes, in my opinion, long term is shorter than it used to be) it would be rational for Presidents Trump and Xi to end the trade war.
This same argument, however, says that in the short term–this week, certainly, and let’s posit a month or so as the limit of “short term”–the rational thing, the self-interested thing to do, is to let the talks fail–for a while. Each side can see the weakness in the other side’s economic position and why not test that weakness by collapsing the talks. Maybe that will generate concessions. Certainly it will let each President look “strong” and that’s not an insignificant advantage when each is faced with significant domestic opposition that doesn’t want a deal unless it humiliates the other party.
If you bail too early in a game of chicken, you certainly avoid death from a head-on crash, but you risk losing a huge amount of face. I don’t think either President is at the point where that is a risk he is willing to take. Much better to let the talks collapse, see what pressure that puts on th other side, and then reap any credit from restarting the talks.
Today, Thursday, President Trump said that a trade deal with China was still possible ahead of the 12:01 a.m. deadline for raising tariffs on Chinese exports to 25% from 10%. Trump said he may hold a phone call with Xi this afternoon, although as of 1 p.m. Washington time no phone call was scheduled, according to White House sources. Xi “wrote me a beautiful letter, I just received it, and I’ll probably speak to him by phone but look we have two great alternatives, our country is doing fantastically well,” Trump said. “Our alternative is an excellent one; it’s an alternative I’ve spoken about for years. We’ve taken well over $100 billion from China in a year.”
At the same time as the U.S. President was holding out hopes for an agreement U.S. Trade Representative Robert Lighthizer was calling members of Congress to warn that a deal this week is unlikely.
At a rally last night Trump said that China “broke the deal” by backsliding on prior commitments, leading him to order higher tariffs.
As of 2:30 p.m. New York time on Thursday, the Standard & Poor’s 500 was down 0.23% and the Dow Jones Industrial Average was off 0.45%. The NASDAQ Composite was lower by 0.33%. The markets have moved up from morning lows on President Trump’s optimistic comments.
