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Big Deal Or Little Deal? What's The Deal With Trump's Trade Truce?

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Big Deal Or Little Deal? What's The Deal With Trump's Trade Truce?

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Okay, so the G20 Summit turned out to be a bigger deal than some of us predicted. It seemed like the stuff of posturing and hot air. It was hard to see anything substantive changing from the weekend meetings of the G20 nations in Argentina. In some sense, you might still say that nothing more than can-kicking happened, such as Bloomberg columnist, Tyler Cowen, writes. 

After all, the U.S. has merely pledged to postpone raising tariffs to 25 percent on $200 billion of Chinese goods. China in turn has pledged "to buy more U.S. goods," as vague as the pledge remains. The two countries now have 90 days to reach a broader trade agreement, which covers forced technology transfer, intellectual property protection, and cyberattacks in addition to standard trade issues.  

Meanwhile, for your short-term, Santa Claus gift-giving-and-receiving pleasure, this will be a good thing. Even from the economic macro perspective, in terms of what this means for the U.S. economy you can safely project reason for optimism. Wall Street rallied after the market opened for trading on Monday morning, with the Dow Jones Industrial Average adding more than 300 points, led by industrial companies such as Boeing (Nyse: BA) and Caterpillar (Nyse: CAT).

The symbolic elements of the deal are at least as important, Cowen writes. "First, China has acknowledged that exports of fentanyl, a highly addictive synthetic drug, are a very real problem for the U. S., and has pledged to ban them. In addition to the benefits of the ban itself, simply getting China used to the idea of accepting blame — for anything — counts as a step forward. It's a sign that China will start conducting its diplomacy less defensively and more like a normal member of the global community."

Cowen says it's important to realize the global trade issue with China has been building up for years, and has had bipartisan support on a variety of ways to deal with their complexity. In other words, this isn't another example of Trump creating a problem and then pretending to solve it. To Trump's credit, it keeps the issue with China from being swept under the rug.  

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While the anticipation of the next round of tariffs has received much attention, and many have accused their various supply chain pain points as being effectively about the tariffs, for the time being, the U.S. has conceded nothing but a little time. China, on the other hand, has a great deal to figure out.

According to senior fellow at the Hudson Institute, John Lee, the next phase for China is unsettling. "We are merely entering the next phase of what will be an enduring economic competition between the world's two largest economies," he writes. While America will take the next 90 days to figure out how much it's willing to compromise—and to what specific end—China "must rethink its fundamental negotiating strategy and time is running out."

Retaliatory pain for American firms hasn't divided and distracted America in the way that Beijing calculated. While Xi will be desperate to avoid the tariff increase in 90 days time if he is to realize his grand economic plans for China, Trump, by contrast, will continue to be buoyed by the strong stock market and historic unemployment.

According to the Wall Street Journal, the key here is less China's promises than enforcement. "China always claims to be playing by the rules but then its regulators find excuses to block a transaction, or a joint-venture partner suddenly becomes a business competitor with stolen IP. The U.S. and foreign companies need the ability to report abuses and then have their governments respond quickly so China will enforce its own rules."

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It is probably naïve to think that the U.S. holds all the cards here. First and foremost, from the president's perspective and facing re-election, the cliché, "It's the economy, stupid," holds as relevant as ever. Over the past 100 years there's only one economic indicator that matters: the unemployment rate. Currently, it's the lowest since 1969. Whatever that rate is, if the rate is higher than that in October of 2020 the president is unlikely to get re-elected. GDP doesn't matter. Only if there's a change in the unemployment rate. Hoover saw a change. Ford, Carter, and George H.W. Bush saw a change, and they're the only ones not to be re-elected in the last 100 years.

If the Trump Administration really wants to take the swooning economy and galvanize support they might consider forming a coalition of allies to confront China. Europe, Japan, Canada and other countries have similar complaints about China's trade practices. One problem with that, however, is Trump wouldn't be able to assemble such a coalition unless he dropped his steel and aluminum tariffs and his threat of car tariffs. In other words, he'd have to work more cooperatively with traditional allies rather than ratcheting up tensions with everyone.

The problem is complex and there are no easy answers. The national debt is as high as it's ever been. "The once-in-a-generation tax cuts weren't balanced," according to economist Jason Schenker. Long term, Schenker says to expect the China and U.S. trade situation to remain frayed and maybe get worse.

We also have no idea what "very substantial" amounts of purchases China will agree to purchase in the area of farm, energy, and industrial products, nor what impact this will have on supply chain and freight markets. We do have something we did not have heading into last weekend: a glimmer of optimism, and a brief reprieve from what will amount to a heavy tax on Americans if the tariffs do come to port.

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The preceding article is from one of our external contributors. It does not represent the opinion of Benzinga and has not been edited.

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