While Peter Navarro’s recent speech on trade and security was hawkish toward China and suggests the likelihood of a deal at the G20 is low, we view NEC Director Kudlow’s public rebuke of Navarro’s remarks as a sign that others in the administration would prefer to tone down tensions rather than raise them.
That’s from Barclays and it comes from a note dated November 16.
The reference there is of course to Navarro’s wild speech, delivered two Fridays ago at the Center for Strategic and International Studies in Washington. For those who missed it, Navarro accused Wall Street of being “unregistered foreign agents” operating at the behest of China to undermine the President’s agenda.
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“He was not speaking for the president, nor was he speaking for the administration,” Larry Kudlow told CNBC last week, before lambasting Peter as follows:
His remarks were way off base. They were not authorized by anybody. I actually think he did the president a great disservice. I think Peter very badly misspoke. He was freelancing and he’s not representing the president or the administration.
That may be, but one person who wasn’t just “freelancing” when he adopted an absurdly adversarial approach to China and trade was Vice President Mike Pence who, over the weekend, managed to ignite fears of a new cold war after trading insults with Xi at the APEC summit in Papua New Guinea.
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There may indeed be, as Barclays puts it in the note cited here at the outset, “others in the administration [who] would prefer to tone down tensions rather than raise them”, but the protectionist bent is pretty clearly the default position.
In any event, the readily apparent contentiousness that pervaded APEC effectively makes the G20 even more important than it already was. The world is anxious and wants to see progress.
So, just what would “progress” look like? Well, Barclays has some ideas.
“In our view, a ‘framework agreement’ at the G20 could include commitments by the Chinese to purchase more US exports — primarily in agriculture and aircraft — and steps to increase openness to the Chinese economy for US services companies [while] in exchange, the US would provide relief on tariffs”, the bank writes, in the same November 16 note cited above.
Don’t forget: China already tried this. Upping purchases of U.S. exports was at the heart of a “truce” struck by Steve Mnuchin and Chinese Vice Premier Liu He in Washington on May 19. A day later, Mnuchin went on Fox News and declared the trade war “on hold”.
That lasted all of about 10 days. Facing a backlash from the protectionist contingent and fearing Mnuchin’s “on hold” comments sent the “wrong” message to his base, the President abruptly changed course, refusing to grant further waivers to Canada, Mexico, and the European Union on the metals tariffs, and setting a deadline (July 6) for the imposition of duties on $34 billion in Chinese goods. It’s been a train wreck since then.
In any event, Barclays goes on to say that despite Wilbur Ross’s contention that the tariff rate on the $200 billion in Chinese exports which were slapped with 10% taxes from September 24 will be raised in January irrespective of what happens in Buenos Aires, “a G20 agreement could mean the higher tariff rate does not go into effect.”
The bank then suggests “any agreement is likely to include benchmarks whereby each side can assess the other’s progress [and] with benchmarks comes the risk that any agreement goes off track at a later date.”
(Barclays)
For Barclays, the main impetus for some kind of draft agreement at the G20 comes from growth concerns. China’s economy is obviously decelerating and the bank notes that “China’s macro policy space has become more constrained now compared with previous down-cycles.”
For Trump, Barclays says the calculus is political. To wit:
While the factors encouraging US participation in any G20 trade deal are less clear to us, we believe the Trump administration is likely looking to policies that could continue the current US economic expansion through the 2020 elections, or at least avoid actions that could weigh excessively on growth through that time. The outcome of the midterm elections, where the Democrats took control of the House, means further action to stimulate the economy is unlikely. If so, the US has likely already seen its peak rates of stimulus-induced growth in activity, leading the Trump administration to seek ways to avoid tit-for-tat escalation on the trade front.
Maybe, but remember that Trump has repeatedly demonstrated he sees more utility in keeping tensions with China alive than in deescalating things when it comes to riling up his base. Look at his midterm strategy: It was less about the economy and more about the migrant “invasion.” In other words, Trump believes the “us versus them” narrative is more powerful than any economic story.
Whatever the case, Barclays says any truce would likely be short-lived.
In addition to trade, the bank reminds you that the U.S. has “long-term national security concerns from alleged intellectual property theft, forced transfer of technology, and China’s industrial policies [and] these are unlikely to be resolved through any deal that reduces the trade deficit temporarily and marginally increases access to the Chinese economy.”
Mike Pence underscored that assessment over the weekend and indeed, his comments at APEC suggest the problems go far beyond concerns about China’s “opening up” and IP theft.
