Apparently, Bob Lighthizer, Steve Mnuchin and Liu He will speak over the phone Friday in an effort to move towards agreeing on the text of the nebulous “Phase One” trade deal that Donald Trump continues to insist is real, despite nobody (including him) being able to say, with any degree of specificity, what’s in it.
All we know is that Trump delayed a tariff hike, and that China has tentatively committed to buying more US farm products, although that depends on your definition of “more”.
The Chinese are willing to ramp purchases back up to pre-trade war levels in year one of any deal. Getting to the $40 to $50 billion level that the White House has variously touted will require tariff relief.
That tariff relief will be discussed by Mnuchin, Lighthizer and Liu, according to sources who spoke to Reuters.
Essentially, Beijing wants Trump to remove the tariffs implemented on September 1 and take the planned December escalation off the table.
“To seal the deal, Beijing is expected to ask Washington to drop its plan to impose tariffs on $156 billion worth of Chinese goods, including cell phones, laptop computers and toys, on December 15”, Reuters says, adding that the Chinese are “also likely to seek removal of 15% tariffs imposed on September 1 on about $125 billion of Chinese goods”.
That would amount to Trump rolling back the escalation he announced on August 1, the day after the Fed meeting. That escalation was enhanced on August 23 after Jerome Powell’s speech in Jackson Hole (on the same day, China announced retaliatory measures). On August 13, Trump split the new tariffs into two tranches, in a bid to prevent a spike in prices on consumer goods ahead of the holiday season. That triggered a rally in US equities, which promptly disappeared the following session when the 2s10s curve inverted.
Note what the August 1 and August 23 events have in common: The Fed.
The scheduled December 15 tariff escalation comes within days of the final FOMC meeting of 2019. If the Fed cuts rates next week, it’s likely that Powell will telegraph a pause or an outright stop to what is, so far anyway, a shallow easing cycle. If Trump removes the threat of the December tariffs, he will effectively relinquish the most effective tool he has when it comes to dictating US monetary policy.
“The market moves are much larger, statistically highly significant, and more clearly skewed to the downside, ranging from -14bp to +4bp”, Goldman said earlier this month, in the course of comparing the reaction in rates to Trump’s trade tweets to how Fed funds futures respond to monetary policy tweets. “Cumulatively, the impact on market expectations for the funds rate is about -40bp when we include tweets indicating escalation of trade tensions and tweets indicating de-escalation, and about -60bp when we focus only on tweets indicating escalation”.
If Trump commits to removing the December tariff escalation, he will effectively give up leverage vis-à-vis Powell in order to secure a signature from Xi at APEC next month.
Of course, Trump could always just take those tariffs off the table now and then put them back on after Xi signs on the dotted line, but doing that would risk a grievous market selloff and would probably cement (both in the minds of the market and the Chinese) the idea that the US president isn’t in full possession of his faculties.
It’s also possible Trump will be impeached between now and the December Fed meeting.
You’re reminded that the August 1 escalation effectively amounted to Trump making good on his threat to go “all-in” on the China trade war. The tariffs announced that day meant that as of December 15, the US would have applied levies to the entirety of Chinese imports.