Donald Trump is “pleased” to inform you that he has decided not to deliver an open-handed slap to the face of Xi Jinping by refusing to extend the March 1 deadline beyond which the tariff rate on $200 billion in Chinese goods was set to double to 25%.
“I am pleased to report that the US has made substantial progress in our trade talks with China on important structural issues including intellectual property protection, technology transfer, agriculture, services, currency, and many other issues”, Trump tweeted on Sunday night, adding that “as a result of these very productive talks, I will be delaying the US increase in tariffs now scheduled for March 1.”
First thing’s first: Trump didn’t write that. It’s more statement than tweet, which means someone in the communications department wrote it. There are no misspelled wordzes and the tone is far too formal to have emanated from a brain as “large” as his.
Humor aside, this was preordained. After last week, it would have been an egregious affront to Beijing had Trump not extended the deadline and, perhaps more importantly in the president’s mind, a delay in announcing the extension had the potential to rattle markets given that the president’s focus will now turn to the Kim summit in Hanoi.
“Assuming both sides make additional progress, we will be planning a summit for President Xi and myself, at Mar-a-Lago, to conclude an agreement”, he continued, before proclaiming this “a very good weekend for US and China!”
Again, this was a foregone conclusion, but considering Trump’s penchant for abruptly changing course just when things seem to be headed in the right direction (e.g., his decision to force a government shutdown in December, the day after the Fed meeting) this comes as something of a relief.
Of course very little progress has actually been made on some of the structural issues Trump cites, but it wouldn’t be fair to characterize his optimistic tone as a “lie.” It would have been extremely untoward for him to water down this announcement with some kind of implicit threat about sticking points around IP theft and forced technology transfer. That is, this needed to be as unequivocal as possible and in this case, there’s no harm in pretending given that everyone has been pretending for weeks when it comes to whether there’s been movement on the Chinese side regarding the thornier issues.
This seems like an opportune time to bring in some further excerpts from a Barclays note we cited in our week ahead preview.
The bank considers two possible scenarios when it comes to efforts to slash the trade deficit, one base case centered around an offer China reportedly made in January and another “fast track” case that would see China offer “to expand imports from the US by a total of USD750bn by 2021.”
“While there could be more practical challenges with the aggressive plan, such as the feasibility of dramatically enlarging trade capacity, the schedule would in theory increase China’s imports from the US to USD550bn by 2021 and turn the US trade balance with China to a small surplus of USD12bn”, the bank writes.
As far as what China would buy, Barclays notes that because a “significant part of the deficit is due to lower-end manufactured goods such as clothes and toys, which China is unlikely to import significantly more of, the most viable way to reduce the deficit would be for China to expand purchases of those goods where the US already has a surplus (energy and agricultural goods, etc), or those with deficits but still strong sales to China (electronics, machinery, etc)”.
Trump has made a show of talking up China’s plans to increase purchases of US goods and there have been no shortage of attempts on the part of the mainstream financial media to ferret out evidence of Beijing’s efforts in that regard.
As far as the currency pledge is concerned, we’ve been over that repeatedly and you can read more here and here. Do note that the offshore yuan is sitting at a YTD high and looks poised to appreciate further still.
One possible downside to this extension is that it just prolongs the uncertainty. For now, it looks like the odds of a comprehensive deal being struck are the highest they’ve ever been, but Trump’s announcement does set us up for at least another three weeks worth of trading on every trade-related headline.
Perhaps the most interesting part of this is that we’ll get a read on the extent to which risk assets had already priced in the tariff extension. Since the Fed pivoted dovish, the narrative has generally revolved around the idea that good news on the trade front was necessary for the rally to run any further. Now we’ve got what passes for good news. So let’s see what happens.
Finally, it feels like this wouldn’t be complete if we didn’t include the following classic clip…