Remember that great China trade deal that was coming? It's gone.
This was President Trump projecting wishful thinking on a nation of 1.2 billion people who grew out of dollar a day poverty exactly by doing what it has been doing up until now. The best the U.S. can hope for is China stops subsidizing certain industries (unlikely given its Made in China 2025 policy), and keeps opening its market to foreign investors — both corporate investors setting up shop as a majority partner, and portfolio investors who can buy and sell Chinese mainland securities like a local. That's probably as good as it gets.
For years, corporations have been hoping for a U.S. China bilateral agreement. But much of that depends on China doing away with an economic model that made it what it is today.
Following a briefing from his trade team about the recent Shanghai trade talks, Trump announced that he will impose a 10% tariff on another $300 billion of Chinese import on Sept 1. He said his decision stems from China’s slow progress in delivering on commitments to buy U.S. agricultural goods, and a lack of new proposals being offered by the Chinese team. It also came against the backdrop of Trump improving in more recent polls, China hawks Elizabeth Warren and Bernie Sanders do well against Joe Biden in some surveys, and the Fed’s “insurance policy" rate cut this week.
"This new development suggests the situation is moving from a ceasefire scenario to the escalation scenarios we described in June," say Barclays Capital analysts led by Jian Chang in Hong Kong writing in a note on Friday. "In such a scenario, we expected Trump would continue to exert ‘maximum pressure’ for a more favorable deal, while China held firm."
BarCap's escalation scenario assumed GDP growth forecasts of 6% this year and 5.5% next year, China's lowest growth rate since entering the World Trade Organization in 2001.
"The renewed tariff threat shows Trump is still keen on pushing China to strike a grand deal as opposed to a narrow one," Chang says.
When announcing new tariffs, Trump also tweeted that "we look forward to continuing our positive dialogue with China on a comprehensive trade deal."
But to some, this is all starting to look like a charade.
"The great trade deal is a unicorn," says Brian McCarthy, chief strategist for Macrolens, an investment research firm that is pounding-the-table bearish on China. "It never existed but as a charade that both the U.S. and China have used in an attempt to gain control over the decoupling process," he says of supply chain remapping currently taking place throughout Asia. "If China was really going to submit to an onerous one-way enforcement mechanism that would ensure real fundamental changes in China’s economic behavior, I suppose Trump would have given that a shot. But that was never going to be on offer from Xi Jinping’s China."
Trump's decision was opposed by U.S. Trade Representative Robert Lighthizer and Treasury Secretary Steven Mnuchin, the WSJ reported yesterday.
This suggests Trump's top China trade negotiators may think Trump's off-the-cuff decision could make it harder to reach even a narrow deal. Recent tariff increases on $200 billion worth of goods, from 10% to 25% did nothing to move the needle on trade.
China has demanded the removal of tariffs before getting serious about a trade deal, a total non-starter.
BarCap believes there will be no significant concessions from China unless the U.S. offers some compromises. China will continue to defend its ground, perpetuating itself as the victim ready to fight and take on a bully. Meanwhile, they will prepare for economic slowdowns with more stimulus. It is unclear if they will save the yuan from depreciation. It hit 6.99 to the dollar today —its weakest level on the year — before strengthening a tad to 6.94.
Bill Adams, senior international economist from PNC Financial, forecasts the yuan to weaken to 7.1 to the dollar at some point this year due to the trade war.
Lastly, Hong Kong remains a flash point worth watching. Political unrest there could lead to sanctions one day, hurting dollar inflows into Hong Kong and into the mainland if such a sanctions policy removed its special trading status with the United States.
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