With ‘No China Doves Left,’ Market’s Faith In Trade Deal Seems Misplaced

We’re back to the days when a single phone call between Bob Lighthizer, Steven Mnuchin and Liu He can boost risk sentiment.

The trio of trade “principals” spoke over the phone on Friday, and agreed to “create favorable conditions” for the implementation of the trade deal, under which China is supposed to buy up to $200 billion in US goods and services over two years.

Donald Trump, Mike Pompeo and Peter Navarro have spent a good part of the last two weeks casting aspersions and perpetuating a theory that COVID-19 came from the Wuhan Institute of Virology, not a local wet market, claims Beijing vehemently denies. The rhetoric escalated to name calling this week, and there’s talk of a possible future military confrontation if the US attempts to extract “reparations” from the Chinese in connection with the virus. Suffice to say none of that counts as “creating favorable conditions” for trade, so it’s left to Lighthizer, Mnuchin and Liu to clean up the mess.

“Both sides agreed that good progress is being made on creating the governmental infrastructures necessary to make the agreement a success”, a statement from the USTR reads. “In spite of the current global health emergency, both countries fully expect to meet their obligations under the agreement in a timely manner”.

To some market observers, that seems far-fetched in the wake of the epidemic.

Domestic demand in China took a hit from the virus outbreak, and that’s still manifesting in the data. Although exports unexpectedly grew in April, imports fell sharply data out this week showed. The volume of commodity imports actually rose (so some of the decline was due to plunging oil prices), but the bottom line is that the current environment isn’t conducive to implementing a large, bilateral trade agreement.

Early in the outbreak, both sides generally stuck to a series of talking points that revolved around the notion that China could make up for any purchases delayed by the pandemic by buying more later.

Beijing is making an effort. China recently bought a half-dozen cargoes of soybeans, lots of corn and last week ordered some 40,200 metric tons of American meat, the largest such order in seven months, according to the USDA.

None of that is going to mater if the virus recrimination continues, though.

“The Trump administration has moved to involve much of the US government in a campaign that includes investigations, prosecutions and export restrictions”, a feature Wall Street Journal article published this week reads. “Nearly every cabinet and cabinet-level official either has adopted adversarial positions or jettisoned past cooperative programs with Beijing, an analysis of their policies showed”.

How that’s conducive to any kind of cooperation on trade is anyone’s guess. Rabobank ventured that with Mnuchin recently joining in on the hawkish rhetoric around the virus, “there are no doves left in the coop, it would seem”.

You might say it’s an election year, and thus Trump would think twice before jeopardizing an agreement he variously touted as an accomplishment of historic proportions.

Then again, “blame China” was one of the most effective campaign messages during his 2016 run for the White House. There’s every reason to think it will resonate again in the wake of the pandemic.