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Dinner Date: What’s At Stake As Trump, Xi Dine In Buenos Aires

"We'll probably end up with something good at some point." 

Predictably, Saturday saw a steady deluge of headlines ahead of Donald Trump’s dinner party with Xi Jinping.

We got the official dinner guest list, for instance. As tipped on a number of occasions during the week, Peter Navarro managed to get himself re-invited after being initially sidelined for, among other things, going off script while speaking at the Center for Strategic and International Studies early last month where he called Wall Street “unregistered foreign agents.”

Here’s the full list:

  • U.S. Delegation:
    • Sec. of State Mike Pompeo
    • Treasury Sec. Steven Mnuchin
    • Chief of Staff John Kelly
    • U.S. Trade Representative Robert Lighthizer
    • National Security Adviser John Bolton
    • White House adviser Jared Kushner
    • White House trade adviser Peter Navarro
    • White House economic adviser Larry Kudlow
    • Matthew Pottinger, a deputy assistant to the president for Asia affairs
    • Two interpreters also will attend
  • Chinese Delegation:
    • Ding Xuexiang, director of General Office of the Central Cmte Communist Party of China
    • Liu He, vice premier
    • Yang Jiechi, director of the Office of Foreign Affairs Commission
    • Wang Yi, state councilor and minister of foreign affairs
    • He Lifeng, vice chairman of National Committee of the Chinese People’s Political Consultative Conferences, Minister of National Development and Reform Commission
    • Zhong Shan, minister of commerce
    • Cui Tiankai, Chinese Ambassador to the U.S.
    • Wang Shouwen, Vice Minister of Commerce
    • Zheng Zeguang, a vice foreign minister, will be notetaker

As the group sat down for dinner, Trump went out of his way to emphasize that he cares very deeply about maintaining cordial ties with his good friend Xi. “[Our relationship] is very special”, Trump said, adding that the two leaders will “probably end up [with something good] at some point.”

For his part, Xi played along, telling everybody that he and Trump have “developed a personal friendship”. It’s like the old saying goes: “A bond forged over tomahawk missiles and giant pieces of chocolate cake is never broken” – or something.

Read more

Chocolate Cake Diplomacy Gets Biggest Test Yet As Trump-Xi Meeting Dominates Global News Cycle

Wang Yi (mentioned above in the guest list), says the media needs to “be patient” when it comes to news from the dinner.

Just to reiterate what’s at stake, the Trump administration is set to ratchet up the tariff rate on the $200 billion in Chinese goods that were taxed at 10% from September 24 to 25% at the turn of the year. Markets are hoping that will be delayed.

The issue here is that if Trump does agree to delay that tariff hike, it would seemingly rule out the possibility of publishing a list in conjunction with tariffs on the remainder of Chinese imports, as the President has variously threatened to do. After all, it wouldn’t make much sense to agree not to hike the rate on existing tariffs only to move ahead with duties on another $267 billion worth of goods.

The problem for China, obviously, is that they cannot respond reciprocally to further tariff escalations because of the discrepancy illustrated below.

Exports

(Bloomberg)

That means Beijing will need to get “creative” going forward assuming there’s no breakthrough. Many observers worry that if the yuan breaches a 7-handle, capital flight will ensue and markets will panic.

Right up until the September escalation, Trump hadn’t actually taxed all that much in Chinese imports, but after September 24, that changed, and it’s readily apparent in customs receipts:

TariffIndex

(Bloomberg)

Financial markets are clearly on edge, although Jerome Powell’s dovish relent took quite a bit of pressure off U.S. equities this week. There’s a broad consensus that if absolutely nothing comes of this weekend’s dinner (i.e., if it’s a complete failure), markets will trade poorly and China will be forced to ease further in order to shield the economy. That said, any positive news could catalyze a powerful risk rally.

As we noted on Friday morning, Goldman thinks the “most likely” scenario is a further escalation. A close second, the bank says, is a “pause”. Yesterday evening, Goldman was out with another piece (penned this time around by the bank’s Jan Hatzius and the same seven colleagues who always get the second byline).

After reiterating that the most likely outcome is an “optimistic tone but no immediate new commitments”, the bank lists three reasons why it might still be “too soon” for a deal.

“First, for as much as financial markets and affected industries might cheer a truce in the trade dispute, there is fairly broad political support—among the public and among members of Congress—for taking a tough stance on US-China trade issues”, Goldman writes, before citing recent soundbites from Schumer and Senate Finance Committee Ranking Member Wyden who have suggested that Trump shouldn’t just accept a photo op and a nebulous set of commitments.

Beyond that, Goldman reminds you that “reaching an agreement could be technically challenging” and if you ask the bank, they “do not believe there has been sufficient groundwork ahead of the meeting to allow for any sort of specific agreement at the G20 [and] without a specific and enforceable agreement in hand, it is also unclear whether the White House would be willing to reverse the planned step-up in the tariff rate to 25%.” Good point, although Trump could always do what he did with Juncker back in July, which is simply agree to hold off for the time being only to gradually step up the bombast in the coming months.

Finally, Goldman suggests that with the midterms out of the way, the incentive might not be there. To wit, from the bank’s note:

This might not be a politically opportune time for an agreement. While some observers argue that President Trump might ultimately agree to a deal with China that results in only modest policy changes (as was the case with the US-Mexico-Canada Agreement) or involves a promise to hold off on additional tariffs in return for a commitment to negotiate (as was the case earlier this year with the EU on auto tariffs) we note that both of these examples occurred shortly before the midterm election, when announcing “wins” on trade policy carried larger political advantages.

You can draw your own conclusions. For now, we’ll leave you with a picture from dinner…

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