The Truth About the Trade Deal

Late Saturday the American Caesar emerged in triumph, his head wreathed in laurel, his frame draped in the imperial purple.

He had come, he had seen… and he had conquered.

After talks with China’s Xi Jinping in Buenos Aires, Trump claimed China would be “opening up” to American wares and “getting rid of tariffs.”

The Washington Post lists the terms of victory:

  • In return for shelving a major escalation in tariffs on $200 billion in Chinese goods set to bite on Jan. 1, the Chinese will buy an as-yet unspecified amount of American farm, energy and industrial goods; 
  • the Chinese also pledged to crack down on fentanyl, a synthetic opioid fueling an epidemic of American overdoses; 
  • and the Trump administration set a 90-day timer for the two sides to reach a breakthrough on a long and knotty list of U.S. complaints about Chinese economic policy.

“An incredible deal” he had won for his people, exulted the Great Negotiator… “one of the largest deals ever made.”

But it was the president’s imperial pride that was talking.

In reality, Saturday evening’s talks resulted in neither victory nor defeat.

Trump battled Xi to a draw, honors even.

No blood was drawn, no lances were broken, no white flag went up any pole.

The feuding parties merely agreed to a three-month ceasefire, a three-month truce.

There will be no new tariffs for now. That is all.

As explains Christopher Balding, former associate professor of business and economics at the HSBC Business School in China:

Cannot be emphasized enough: This is not a deal and it is not a resolution. This is an agreement to delay further escalation. Neither side really gave anything except some cotton candy sweeteners. Nothing fundamental.  

But markets have gotten behind the ceasefire… and stocks were up and away today.

As Churchill never said, “Jaw, jaw is better than war, war.”

The Dow Jones surged 288 points today. The S&P bounced 30, while the trade-sensitive Nasdaq rallied a trade war-defying 111 points.

But if the United States and China cannot come to lasting peace terms in three months’ time…

You can expect the cannons to reopen, the whistle to blow and the troops to go back over the top.

Will the ceasefire hold?

Goldman Sachs says no:

The specter of higher and broader U.S. tariffs remains, and the underlying issues clouding the trade relationship are deferred to further negotiations. With additional time to pursue negotiations, we think the chance of a comprehensive deal that involves rollback of tariffs is [unlikely].

What odds are those?

“Perhaps a 20% probability over the next three months.”

There may be justice here.

Neither side could even agree on a joint statement this weekend.

The Chinese statement said both sides should “work toward scrapping all tariffs.”

The American statement did not.

Nor did the Chinese statement include any pledge to purchase a “very substantial” amount of American products.

In striking fact… it made no explicit reference to any 90-day deadline.

The Wall Street Journal’s Bob Davis on the way ahead:

In a sign of the difficulty of the talks ahead, Chinese officials haven’t acknowledged they accept the U.S. negotiating agenda or any deadline for talks. Nor is it clear what accommodation on any or all of the issues would prove sufficient to hold off the U.S. from raising tariffs when its deadline expires.

Who will force the other to terms first — Trump or Xi?

Trump has hitched his presidential fortunes to a rising stock market and a roaring economy.

Is he prepared to risk it all on a runaway trade war?

Robert Mueller has his scent… and the Democrats are hot for his scalp.

Whispers of impeachment circulate.

A tumbling stock market and recessionary economy could possibly deliver the president into his enemy’s hands.

Republicans have the Senate, it is true.

But If Trump loses the stock market and the overall economy… would Trump have the Republican Party?

Perhaps. Perhaps not.

Maybe Trump fears a Brutus will plunge a fatal dagger in his back.

A trade deal, seen from here, might be the way forward.

Xi must surely live in fear of his own.

The Chinese economy is a skyscraper of playing cards erected upon a cracking foundation of debt… and its stock market is sunk in a bear market.

China’s economy serves a far greater master: social stability.

Millions of unemployed and resentful young men are Chinese leadership’s deepest fears.

It is desperate to keep them distracted on the factory floors.

As asks Jim Rickards:

Think the still export-based Chinese economy can afford to sell significantly less manufactured goods to the U.S.?

The three-month countdown begins January 1.

Who will be first to blink?


Brian Maher
Managing editor, The Daily Reckoning

The Daily Reckoning