Opinion

Trade Deal Games

With 2 tweets China’s tech indices were sent down 8% in overnight. The tweets I’m of course talking about are Donald Trump’s tweets threatening to raise tariffs on China this coming Friday. This after dozens upon dozen of trade optimism rallies in 2019:

Market sold off overnight and immediately bounced on the open as nothing get’s taken seriously anymore, too ingrained is the reflexive behavior to buy the dip, any dip. Why? Because it works and keeps working.

But now we find ourselves in a very binary situation. A trade deal was presumed to take place may now very much be in question and the consequences may be significant.

Now the complacent attitude (which may be the right one) is to suggest that Trump’s tweets are a hardball negotiation tactic rooted in decades of playing real estate deals where consequences to walking away from a deal are limited. Already I see interpretations that say it’s all bluster to show he’s not giving things away and that he is acting tough to look better when a deal gets announced.

Actually the tweets appear to have come out of frustration as the Chinese are playing slow ball, not ready to give up certain things:

“In talks last week in Beijing, Chinese officials told their U.S. counterparts they would not agree to a trade deal that required changes to Chinese law, the people said. China had previously agreed to change its laws in the text of the deal, they said.

The change has major implications for provisions of the deal aimed at ending a Chinese practice of forcing U.S. companies seeking to do business in the country to reveal proprietary technologies and other intellectual property”. The U.S. side, led by Trade Representative Robert Lighthizer, thought that issues around what’s known as forced technology transfer were resolved and considered the Chinese position on changing its laws to be an attempt to renegotiate, the people said. Lighthizer was angered by the move and briefed Trump”

And that’s the problem when one constantly tries to hype markets with trade optimism, it leads to a path of mischaracterizing the actual state of affairs:

“But official readouts last week from the U.S. and Chinese governments that depicted the latest round of talks in Beijing as productive were overstated, the people said”.

The Chinese standing their ground? And who can blame them? After all they didn’t choose to start a trade war, it was imposed upon them as were the previous tariffs as are the new tariffs that may be imposed starting Friday.

Now there are many legitimate issues to grabble with China about trade, I don’t think anyone’s denying that. But the Chinese are obviously a party to the negotiation and one has to explain to me why they would agree to a deal that they would view as disadvantageous to them?

Because it will hurt their economy you say? To which I saw: So what? I got news for you. The Chinese don’t think quarter to quarter or even year to year. They’re thinking strategically decade to decade.

So why agree to a deal that’s bad knowing that if they can just delay and sit it out until there’s possibly a new president in office in less than 2 years? Yes the short term pain sucks for them I’m sure, but they don’t think in 2 year time frames.

By now pulling this move Trump risks the Chinese digging in their heels. His move may work in real estate deals, but the Chinese may have little appetite to get bullied and appear to lose face. So there is definitive risk that this either kills a deal or delays it for months on end. In the very short term much will now depend on how the Chinese will react to this. For now they seem to stay on path as they have confirmed their delegation is still coming so perhaps Mr. Trump’s gambit appears to be working.

But the timing is now binary. By Friday this week someone will either cave or show backbone. Will Trump pull back on the tariffs threat? With US markets rallying off the lows and not taking his threat seriously he may have little incentive to do so. Will the Chinese cave and succumb to pressure and lose face in the process? Or will they show backbone and engage in a discussion that leads to further delays?

How will the global economy react, already suffering from global trade woes, to a continued to delay with no foreseeable end in sight? After all the trade war is already over 300 days long and was supposed to end at the beginning of March. It is now May and we may get more tariffs.

At this precise moment in time markets don’t seem to consider the negative outcome to be a serious possibility:

We will know more by magic risk free Friday. Markets are currently saying there won’t be any additional tariffs.


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7 replies »

  1. So far the US does not seem to have suffered from the imposed tariffs on a.o. China. However coming Friday is an awfully short term for implementing new tariffs. What you are so far not mentioning Sven, is that PE ratio’s are not very high. Also economic growth is showing an uptick and inflation a downtick. These 3 reasons might matter more to the market short term than new tariffs.

    Thanks for your excellent analyses.

  2. Regarding your comments, Sven, “The Chinese standing their ground? And who can blame them? After all they didn’t choose to start a trade war, it was imposed upon them as were the previous tariffs as are the new tariffs that may be imposed starting Friday… Now there are many legitimate issues to grabble with China about trade, I don’t think anyone’s denying that. But the Chinese are obviously a party to the negotiation and one has to explain to me why they would agree to a deal that they would view as disadvantageous to them?”

    The Chinese did start a trade war, they just have pretended it wasn’t a war, for over 30 years.

    It has already been prominently reported that China’s goal is to become the dominant player in the world, economically and militarily.

    So, if you don’t impose tariffs to get them to stop stealing US technology and manipulating trade rules to their advantage, what should be done? Just ask them to stop? That’s what’s been done for decades, and it didn’t work. Just do nothing? Ditto.

    Yes, they do play a long game, rather than thinking in the short-term. But what’s our long-game, other than to have them face some economic consequences for the 30 Year Chinese Trade War? Tariffs may not work, but what’s our Plan B?

    Why would they agree to a disadvantageous deal? They would do so only if they judge that the pain of not agreeing is too great.

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