The US-China Trade War ‘Truce’ Merely Postpones the Next Escalation

There is less going on here than is being touted

China buys swing-state pork it wants anyway, Huawei gets a little longer window to stockpile what it needs

Editor’s note: In essence what happened was that China walked back for now (effective) bans on US soy and pork which were never in its interest to begin with, and in return gained a longer reprieve on tarrifs and Huawei. If anything it shows pork and soy were the right places to pressure.

Another G20 has come and gone. Another trade war ceasefire is upon us.

If this past weekend’s trade truce with China looks like the last trade truce at the G20 in Buenos Aires, it’s because it was done in exactly the same way: a temporary pause agreed upon by two leaders who rarely get to meet face-to-face and may (or may not) actually get a long and not really want to cause pain to one anothers economies. Let the dust settle a bit. The trade war is merely on a summer hiatus.

The agreement gives Huawei a few more days to acquire American computer hardware for its smartphone and other telecommunication devices, and avoids the next round of tariffs on an additional US$300 billion worth of China-sourced imports. If applied, China would effective have tariffs on all of its U.S.-bound shipments.

So far, some $250 billion worth of China imports are tariffed at 25%.

It also requires China to stop effectively sanctioning U.S. soy purchases. Last crop season, they bought 10 million more tons from Brazil, shutting out the U.S.

The U.S. China Business Council, the lobbying group representing American multinationals interests in China, put out a statement immediately on the news which amounted to a sigh of relief that the two sides were back to the negotiating table. For years, the USCBC was against tariffs, but have since been convinced that tariffs have become the only way to bring China to the negotiating table.

The group says that issues the United States is seeking to address with China are “the right ones” and that their resolution “will benefit not just foreign companies doing business in China, but also China’s economy.”

Asian stocks are up Monday morning thanks to yet another gentleman’s agreement not to escalate the trade war. Shanghai is up nearly 1.5%, which means it will be a good day for the X-Trackers China CSI-300 A-Shares (ASHR) exchange traded fund.

From Trump’s perspective, China represents a manifold challenge, as it is also a proxy for new trade accords across the board, notably with the EU.

“He’ll want something to show for his efforts, and if a bad deal is the only one on offer, he’ll walk,” says Vladimir Signorelli, founder of supply-side investment researchers Bretton Woods Research.

A cease-fire does not mean the pressure is off. We have seen this before post-Buenos Aires. Tariffs were raised as planned six months later. As long as the trade war continues, the Trump administration will be successful in remaking the global supply chain away from an over-dependence on China.

The outcome this weekend is in line with the best case scenario of a jointly agreed “time out” that does little to reduce the medium-term risks of decoupling. But gives Wall Street and Asian traders a few more weeks to drive up equity prices.

Trump gave up little to Huawei, despite Senator Marco Rubio’s concern that the president essentially caves every time he shakes Xi Jinping’s hand. Based on current rules set forth by the Department of Commerce, Huawei was already granted a “Temporary General License” through August 19, effectively giving it a breather while it sits on Entity List limbo at the DoC.

Rubio is unlikely to convince Congress to enact veto-proof Huawei-killing legislation so long as it remains on that list but is allowed a slightly expanded list of exemptions. This is especially true when the trade off is more China purchases of American soy and pork meat, two sectors crushed by what has amounted to outright bans on those two important farm belt commodities.

Considering next year is an election year and considering that farm counties went from red to blue in the mid-terms, giving the House of Representatives to an angry bunch of Trump-hating Democrats, it might be better to keep farm states in the president’s corner. It’s a trade-off gamble Trump seems willing to take. He is known to change his mind. So no one should think any of this is written in stone.

Beyond the Huawei extension and China’s promise to buy more soybeans, neither side provided any detail regarding a timeline, nor gave the market any idea as to what are the main sticking points left, and how they are being addressed.

Larry Kudlow, Trump’s economic advisor, put it all this: “New talks, no new tariffs, and agricultural purchases, and the rest of this is going to go on for quite some time, frankly.”

If China’s A-shares look sexy today, take a cold shower.

By the end of the Obama administration, officials in Washington feared China was straying from the path of market liberalization. The U.S., in advocating for China’s ascension into the World Trade Organization, a move that benefited many U.S. multinationals, ended up creating a Frankenstein economy: one part capitalist, one part communist.

They criticized China’s mercantilist model. They criticized its closed market, allowing China to develop global contenders in a closed bubble that didn’t allow for foreign firms to compete with them as they bulked up.

President Trump is escalating a trade war with China just as politicians in both parties, and pundits from both sides as well, are telling him to keep at it.

Writing in The New York Times on June 8, historian Stephen Wertheim noted how Senator Elizabeth Warren rejects America’s past “happy face” China policy, and Senator Marco Rubio tweets about China’s “comprehensive plan to achieve world domination.”

“Washington is gearing up for full-spectrum competition with the world’s No. 2 power,” Wertheim says. “We may be witnessing the start of Sino-American cold war.”

Source: Forbes

  1. JustPassingThrough says

    warren and rubio a couple of mental giants.
    warren the wannabe american indian and rubio the wannabe VE killer.
    neither worth the powder to blow them to hell.

  2. John C Carleton says

    Neither the living souls, living on the face of America or China, wins with this political “mine is bigger then yours” contest.

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