Although markets haven’t hesitated to race ahead on the assumption that one way or another, the US and China are set to ink an interim trade agreement that either forestalls further escalations or, even better, sees Donald Trump lift some existing tariffs, most investors understand that a longer-term deal that would find China rethinking its economic model or otherwise acquiescing to the kind of sweeping changes that were supposed to be the foundation of a “real” pact, isn’t ever going to happen.
What you’re seeing in equities and other risk assets is just opportunistic trading. In bond land, trade optimism is conspiring with better-than-expected economic data and the assumption that central bank easing will eventually buoy growth, to push yields higher.
When it comes to the stuff that “matters” (i.e., intellectual property theft, forced technology transfer, state subsidies, US efforts to undermine China’s tech ambitions, etc.), meaningful progress is a long way off, even as Xi continues to commit to gradual “opening up”. Even the promise of China ramping up agricultural purchases comes with the caveat that at best, Beijing will buy $20-$25 billion annually in the first year, which would only get us back to pre-trade war levels.
All of the above presents the White House with something of a PR challenge. As SocGen put it recently, “it is hard to see how Tump can credibly present [the Phase One deal] as a victory, given that complex issues like IPR protection etc. are likely to remain unsolved”.
Of course, Trump wouldn’t have this problem had he not insisted on couching everything in terms of “winning” and “losing”, but he did, which means the administration needs to figure a way to make the optics a little better, especially if the White House intends to agree to provide tariff relief, as is now widely expected.
And so, the two sides will put on a joint dog and pony show around fentanyl.
“China’s National Narcotics Control Commission will hold a press conference Thursday about a fentanyl smuggling case that was jointly investigated with US law enforcement after a live broadcast of the trial”, Bloomberg notes, citing a notice from the State Council Information Office. “Officers from China and the US will give a briefing on the case and their cooperation on fighting crimes related to the highly addictive painkiller”.
Obviously, this is little more than a publicity stunt. Trump and Peter Navarro have, for most of the last six months, variously accused China of reneging on a promise to curb the flow of illicit drugs. There was talk of an executive order, and during his infamous August 23 Twitter harangue, Trump suggested he might order all deliveries from China searched.
“Also, I am ordering all carriers, including Fed Ex, Amazon, UPS and the Post Office, to SEARCH FOR & REFUSE all deliveries of Fentanyl from China or anywhere else!”, the president shrieked, hours before hiking tariff rates.
“China steals our stuff [and] they flood our communities with fentanyl”, Navarro told Maria Bartiromo that morning, after Beijing announced its intent to retaliate against Trump’s latest planned duties.
Now, in what Bloomberg correctly describes as an effort to “help Trump sell his deal at home where he’s facing a skeptical business community and farmers hurt by his tariffs”, the administration will apparently claim progress on a problem that China recently insisted isn’t actually a problem.
“Trump’s tweet criticizing China’s fentanyl control is inconsistent with facts”, Liu Yuejin, Vice Commissioner of China National Narcotics Control Commission, remarked in September.
Liu went on to say that any assertions about fentanyl illegally manufactured in China coming into the US through Mexico “are the fantasies of some US politicians”.
In any event, it’s doubtful whether this planned spectacle is going to win (or lose) any hearts and minds. Either you’re inclined to take the “Phase One” deal seriously, or you aren’t. A joint press conference about fentanyl isn’t going to sway anybody one way or another in that regard, but it will give Trump yet another story to tell at rallies.