‘Chocolate Cake Diplomacy’ To The Rescue?

Depending on who you listen to, the outlook for Sino-US trade talks is either good, indeterminate or dour.

The story seems to change by the hour and, as alluded to above, this has become almost entirely subjective. “Progress” is in the eye of the beholder.

Last week, news that Trump will not meet Xi ahead of the March 1 deadline was an excuse to sell but that narrative has seemingly shifted. Now, it seems as though most commentators are inclined to believe that the White House won’t let scheduling “conflicts” be the reason why tariffs are hiked on March 1, although we would again note that the only thing keeping the US President from meeting his Chinese counterpart before then appears to be Trump’s giddiness at the prospect of another photo op with Kim Jong-Un.

In any case, everyone will obviously be watching for signs of “progress” out of Beijing this week where negotiators will sit down (again) to have the same discussion around key sticking points. But the headline everyone appears to be keying on is a rather nebulous story out from Axios on Sunday which suggests Xi could come to Mar-a-Lago again.

“President Trump’s advisers have informally discussed holding a summit there next month to try to end the U.S.-China trade war”, Jonathan Swan wrote, citing two sources who cautioned that while Trump’s Florida compound is “the ‘likely’ location for the leaders’ next meeting, nothing is set.” The meeting, the officials said, “could come as soon as mid-March.”

Of course “mid-March” is by definition two weeks after the deadline, so that would again suggest that the cutoff will be extended by the US, but you never know with Trump. News that he’ll soon sign an executive order banning Chinese telecom from US wireless networks and another executive order designed to turbocharge America’s artificial intelligence push, are indicative of how concerned the administration is about China getting a leg up in tech (or in anything, really). Here’s the MIT Technology Review on the AI announcement:

The key focuses of the “American AI Initiative” have been released ahead of time by the Office of Science and Technology Policy.

The initiative is designed to boost America’s AI industry by reallocating funding, creating new resources, and devising ways for the country to shape the technology even as it becomes increasingly global.

However, while the goals are lofty, the details are vague. And it will not include a big lump sum of funding for AI research.

You’ve got to love the “while the goals are lofty, the details are vague” bit. That description could easily apply to every policy initiative Trump has ever floated.

In any event, the telecom executive order and the AI decree both speak to the notion that the White House remains extremely concerned about China’s tech ambitions. The Huawei saga is indicative of how aggressive the administration plans to be in that regard and how “national security” will everywhere and always be trotted out as an excuse where justification for a given decision is required.

Critically, it’s not clear that a “truce” between the US and China will be all that meaningful. In the latest installment of BofAML’s rates and FX survey, some 82% of respondents believe a ceasefire in one form another is likely (left pane below).

(BofAML)

As alluded to in the header for the chart in the right pane, though, it’s not clear that a ceasefire is going to be enough given that it would only prolong the uncertainty that’s casting a pall over the global economy. Here’s BofAML:

While negotiations will probably continue beyond 1 March, it is far from clear we will get evidence of meaningful progress by then. This may prove a disappointment for the close to three-fifths of investors expecting a narrow deal, according to our survey. Moreover, we believe markets are underestimating the strengthened negotiating hand of the Chinese, driven by the combination of the US shutdown and a more dovish Fed, the latter providing some headroom to ease policy. There seems little incentive for Beijing to make significant concessions at this point. While a ceasefire extension may be a short-term positive for market sentiment, it is unlikely to support global trade data. The fact is a ceasefire would mean limited visibility for exporters at a time when inventories are high and global demand weak. This does not bode well for the export cycle, especially for manufacturers.

There are a number of good points in there, not the least of which is the notion that domestic turmoil in the US around the wall fight, the prospect of another government shutdown and the Fed’s dovish pivot (which ensures the policy divergence between the US and China isn’t being pulled ever wider by a hawkish Jerome Powell) have given the Chinese more leverage.

There’s more than a little irony in the idea that Powell has actually helped strengthen Beijing’s hand. After all, Trump has continually insisted that a dovish Fed would give him “cover” for the trade war by ensuring the dollar didn’t continue to rise. But a dovish Fed also means the PBoC can ease without having to worry so much about a widening monetary policy divergence triggering steep losses for the yuan and catalyzing capital flight.

All of that said, BofAML does agree with the notion that an extension of the deadline is more likely than not. “In fact, news that Trump and Xi are unlikely to meet before March only raises the probability that there will be a ceasefire extension at least until when they can meet”, the bank says, in the same note.

So, more “chocolate cake diplomacy” it is!

We can only hope that Xi’s (rumored) next trip to Palm Beach will end up producing the same kind of awkward dessert moment as that which played out in 2017, when Trump told the Chinese strongman the US had just bombed “Iraq” while the two men shared the “most beautiful piece of chocolate cake you’ve ever seen”.