After announcing a three-month truce in his trade battle with China, President Trump said the agreement he hoped to negotiate in the meantime would be one of the largest ever made.
“It’s an incredible deal,” he told reporters on Air Force One, flying back to Washington on Saturday, Dec. 1, from the G20 summit where he met with Chinese President-for-life Xi Jinping. “It’s a deal between the U.S. and China made by the president and the president.”
Wall Street — while hopeful a pact Trump said would dismantle trade barriers and boost China’s purchases of American crops would indeed be forthcoming — was far from convinced.
Even as major U.S. stock indexes notched noticeable gains when trading resumed on Monday, Dec. 3, analysts cautioned that the issues between the two countries, including Chinese appropriation of U.S. intellectual property, would be difficult to resolve — especially in a limited time frame.
Enthusiasm waned further when Beijing failed to match Washington’s upbeat rhetoric and bottomed on Tuesday, when Trump reminded his Twitter followers that if no deal materializes, he’s still a “tariff man.”
U.S. financial markets plummeted, with the blue-chip Dow Jones Industrial Average sliding a precipitous 799 points, a drop larger than its declines during the height of the 2008 financial crisis.
“Trump’s tweet that he will increase tariffs in 90 days without real progress — and confusion about what the administration considers progress — was the initial catalyst for the sell-off,” said Mark Haefele, chief investment officer for UBS Global Wealth Management. “While the likelihood of an ongoing dialogue after months of no discussions and the pause on tariffs are still positive developments, it’s clear that negotiations will be challenging and a source of volatility.”
While Washington and Beijing both attempted to soothe markets afterward with statements expressing confidence that an agreement could be reached, alarm over public comments or the lack of them may be the least problematic aspect of negotiations.
What the U.S. hopes to achieve is far from simple: Trump wants not only to correct a trade imbalance between the two countries that reached $375.6 billion in 2017 but to halt the forced transfer of intellectual property from U.S. companies to Chinese rivals as the price of doing business in the country.
The ability to access such proprietary information, however, is “likely what China wants to hold onto the most as they pursue advancing their own economy,” Luke Tilley, chief economist for Wilmington Trust, told the Washington Examiner.
Beijing’s “Made in China 2025” initiative, for example, is designed to match, and then surpass, Western technological sophistication, particularly in the realms of electric vehicles, telecommunications and robotics. The program is part of the motivation behind Trump’s tariffs, with his White House viewing it as both an economic and national-security threat.
The tariffs — Trump’s preferred remedy — pose risks of their own, however, with lawmakers, economists and corporate executives warning of higher supply costs that would push up consumer prices and undermine the benefits of GOP-led tax cuts in late 2017.
Retaliatory duties from China, meanwhile, have already hurt sales of American crops in the Asian nation and prompted Trump to offer $12 billion in aid to growers.
Other effects have become visible to voters more slowly, with the first round of 25 percent duties applied to $50 billion in imports that are used largely by manufacturers. The next wave, 10 percent tariffs applied to $200 billion in shipments, affected most remaining industrial goods and began to hit consumer products.
As a result of Trump’s talks with President Xi, the White House said it would delay doubling the second levy to 25 percent in January as well as postpone plans to add duties to another $267 billion in imports, which Tilley said would have been a direct hit to U.S. households.
The resulting prices “would be a drag on consumer spending,” he said, which accounts for as much as 70 percent of the $19 trillion U.S. economy. “This would be detrimental for the U.S. and for world growth, so any sign that we see that we will be moving in the other direction is welcome.”
While the truce is one such sign, “that’s not the same as saying that it can’t also get bad again,” Tilley noted.
Indeed, the temporary cease-fire follows the old Washington axiom, “When on a cliff, build more land,” noted Chris Krueger, an analyst with Cowen Washington Research Group, which has tracked federal policy for four decades.
“The gulf between the two sides remains large, with the U.S. delegation seeking fundamental changes in the Chinese economic model that we find it hard to believe will be acceptable to China,” he said.
Beijing’s statements, so far, have been largely limited to broad promises of market-opening measures, commitments on which it has often failed to deliver, according to analysts. A Ministry of Commerce spokesman told reporters midweek that the meeting between Xi and Trump was successful and that Beijing would start on its obligations by implementing unspecified measures on which consensus had been reached.
“This is going to be a long, drawn-out difficult process,” Jason Draho, head of Americas asset allocation at UBS wealth management’s chief investment office, told the Washington Examiner. “It’s one thing to negotiate a reduction in tariffs between two countries. It’s harder to come to terms on an agreement in terms of intellectual property rules and how they’re enforced because they’re much grayer areas.”
While talks are under way, markets would draw reassurance from seeing regular meetings between the two sides, he said, as well as from clearly-established benchmarks on what negotiators want to achieve — such as those the administration provided while revising the North American Free Trade Agreement.
“Otherwise, it’s hard to know what’s being discussed and when a breakthrough or agreements could be made,” Draho said. The weekend talks offer the potential of a good outcome, he added, “but not without volatility and uncertainty along the way.”
