In August, it seemed that the China trade war could only get worse. Yet suddenly the prospects for a China trade deal this fall have brightened. Late Wednesday, President Trump pushed back the tariff hike set for Oct. 1 by two weeks.
As in April and July, good vibes on the China trade front have propelled the Dow Jones and broader stock market indexes toward record highs. Yet after two false springs, which saw Trump pull the rug out from under investors with sudden escalations of the trade war, this time looks different.
The sudden progress reflects both sides scaling back their demands for what a deal must include. Economic and political considerations have taken precedence. That means any China trade deal probably won't transform the U.S.-China economic relationship. Nor will it send the Dow 10,000 points higher, as Trump seemed to suggest last week. Yet a trade truce sealed with big Chinese purchases of U.S. agriculture should at least keep the bears — and recession — at bay.
The Dow Jones rose modestly in Thursday's stock market trading on the China trade news. The Dow and S&P 500 are about 1% off their July all-time highs.
Here are five big reasons why all the tea leaves suddenly point to a China trade deal.
Beijing Relents On Hong Kong
The move that kicked off last week's revived stock market rally spoke volumes. Beijing yielded to a key demand of pro-democracy protests, allowing Hong Kong leader Carrie Lam to withdraw a bill that would permit extradition of city residents.
While just a tactical retreat by Beijing, it showed that Chinese President Xi Jinping's government had the maturity to risk showing weakness when taking a hard line had jeopardized its goals.
Beijing likely sees its two big headaches this year — the China trade war and Hong Kong protests — as connected. Demonstrators have waved the American flag, seeing the U.S. as a beacon of hope. Meanwhile, Trump has said that China has taken a softer line on Hong Kong because a violent crackdown would make a trade deal unviable.
Beijing might even think a trade deal with the U.S. could help quell the Hong Kong protests by discouraging activists who had looked to America for support.
China Can Live With Trump Tariffs But Not Without American Technology
Treasury Secretary Steven Mnuchin said Monday that the U.S. and China had reached a "conceptual" agreement on enforcement. That sounds a lot like another tactical retreat by Beijing. While Mnuchin's wording was vague, it can only imply one thing: China won't let ongoing Trump tariffs stand in the way of a trade deal.
In Trump's view, the key to enforcing a China trade deal is keeping tariffs in place, then phasing them out as Beijing meets its commitments. Up until now, China saw keeping Trump tariffs in place as a deal-breaker. Beijing saw that type of deal as too humiliating and reminiscent of painful episodes, like the 19th century deal that handed Hong Kong to Britain.
Mnuchin hasn't been the most reliable source on China trade talks. Yet his latest revelation looks credible after Beijing's change of course on the Hong Kong extradition bill.
It's also consistent with reporting from Politico that China had asked Trump to punt on the tariff hike set for Oct. 1 and to back off a ban on technology sales by American companies to Chinese communications equipment giant Huawei. Those two moves would reportedly get China to start buying U.S. agricultural goods in bulk again. What's not mentioned is key: an immediate rollback of the Trump tariffs already in place on about $360 billion in Chinese imports.
Beijing may be moving past historical grievances and taking stock of its strategic position.
Trump did delay the China tariff hike, but only until Oct. 15. A Bloomberg report said that the Trump administration is mulling a longer tariff delay or partial tariffs rollback as part of a narrower, interim agreement. That briefly sent the Dow Jones to session highs, but a White House official told CNBC that it's not considering any interim deal.
Meanwhile, a Thursday report said China might even put its demand for a Huawei export ban reprieve on the back burner.
China will likely draw the line at rewriting laws and changing its state-driven economic model. That would impinge on its sovereignty. But keeping Trump tariffs in place may no longer rise to that level.
No doubt China's economy has suffered from Trump tariffs, which give companies reason to move production to Vietnam or elsewhere. Yet the weakening of the yuan vs. the dollar has softened the blow. The damage from Trump tariffs is like having streets littered with potholes after a stormy winter. A big repaving job is required. Pervasive U.S. export controls of advanced semiconductors and chipmaking equipment would be more like the collapse of a bridge en route to the ascendant high-tech future China imagines.
What China needs more than anything is time to wean itself off its technological dependence while developing its internal capabilities. The only way to buy time may be to agree to live with Trump tariffs, and Beijing seems to have made that choice.
Trump Gets To Have His Cake And Tariffs Too
It's clear why Trump has been so insistent that his China tariffs stay in place, likely through the 2020 election. Beijing has a track record of backtracking on trade commitments. Improvement in the U.S. trade gap with China will take time to materialize. That could leave Trump exposed to political criticism that he gave away the farm to secure more soybean purchases.
Keeping tariffs in place immunizes him against the charge he got a bad deal. That's because the China trade deal would hinge on Beijing making further progress, and Trump might not have to give up that much, at least initially.
In other words, Trump stands to get the rewards — increased Chinese purchases — without taking a big political risk.
This sounds exactly like the interim deal that the Trump administration is considering, according to a Thursday Bloomberg report.
China Trade War Raises 2020 Election Risk For Trump
Last Friday's jobs report, showing just 96,000 new private-sector jobs, underscored the economic risk tied to an escalating China trade war. Trump no longer has the luxury of a high-growth economy. Though he may blame the Fed, not his own tariffs, Trump probably realizes that the path of further escalation is fraught with risk — both to the economy and his own reelection.
The September IBD/TIPP Poll showed that only 14% of Americans backed further escalation of China tariffs. Trump's China trade policy earned a 39% approval rating and 49% disapproval.
The status quo doesn't look benign either. Not only would Trump own the downside of his China trade war, but a decision to stop escalating also could face criticism for giving Beijing time to develop its own technology. Trump's whole trade war strategy would be in question.
China Trade Talks And North Korea Policy Are Linked
Any nuclear deal with North Korea probably runs through Beijing.
The relationship between North Korea and China is complex. But China has significant economic ties with North Korea. It has often taken Pyongyang's side against harsh international sanctions and has some influence on North Korea's behavior.
Trump's walk into the Korean Demilitarized Zone to shake hands with North Korea's Kim Jong-un in June came amid a brief thaw in U.S.-China trade hostilities. The day before, Trump pledged to ease restrictions on Huawei and restart trade talks, while calling China a "strategic partner." The timing looks like more than a coincidence.
After the DMZ, Trump began talking up a White House visit for the North Korean leader. But the idea fell off the radar as the China trade war escalated. Trump wants to make a run at a Nobel Peace Prize. But to get his White House summit, he'll have to tone down the trade deal demands he makes of Beijing.
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