Time may be running out for both sides in trade talks between the U.S. and China. The Chinese economy is weakening and there are many bubble aspects to it that Beijing is aggressively trying to manage so they do not burst. What they are doing is attempting a soft landing from what has been a historic period of really unprecedented economic growth in that country impacting the world. Trump has gotten their undivided attention by sticking pins in their bubbles forcing them to terms that would have him stop.
Some of the change that Trump is forcing is in their beneficial self-interest long term and I think they know it. Opening their markets and coming under some rule of law on intellectual property issues is being demanded by all of their trade partners…not just by us. This way the trade war is providing them the opportunity to make domestic changes that are in their own interest that they otherwise may not have been willing to make. They needed a push. There will be a limit as to how far that they are willing to go and it will be up to the trade negotiators to find that limit by March 1st.
A failure of these talks would do neither side any good whatsoever. In fact, it would put the entire world economy at risk, if new rounds of tariffs were exchanged and the trade war morphed into becoming a cold war. The world economy is slowing to the point where any additional existential catalyst could push it into a global recession. That is similar to where I said that the U.S. ag economy was in my 2017 ag outlook. I said that we were not in a recession but any new existential catalyst would push us into one. The trade war was the kicker and most farmers now see the ag economy as in recession.
When Trump claims that the current economy is the best ever in history, how can that be with us left out? This trade war has gone on much longer than the optimists who had said last summer it will last a couple months. The last time that global trading partners exchanged this many tariffs and trade barriers was the Smoot-Hawley tariffs in 1930 that worsened the Great Depression. The difference is that in 1930 it was the Republican Congress who passed the Smoot-Hawley Tariff Act and pushed Herbert Hoover into signing it.
This time this trade war was not an act of Congress but an executive action by one man…President Trump. The Republican Congress has been a bystander who failed to execute its oversight responsibility and legislative power relative to U.S. trade policy. Congress has been along for the ride. The ag sector has been taken for a ride.
Congress will be asked to step up and ratify the USMCA early next year. The USMCA protects all of the benefits that were in NAFTA so the ag sector needs Congress to sign off on it. That is not gonna happen until Trump first drops the tariffs on Mexican and Canadian steel/aluminum and until he makes a deal with the Dems/Nancy Pelosi to ratify the agreement. I will assume that Trump and Pelosi will become much more transactional with each other next year than they displayed this week.
China has one major advantage over Trump. China has been around for 4000 years at least and has the ability to take the long view while Trump, at best, may make it to the end of a single term in office. Xi Jinping doesn’t have to run for re-election…they changed their constitution so he is president for life.
Trump has taken a lot of hits recently as his legal jeopardy was exposed by authorities. My view is that it is just the beginning of his trouble. The crimes that he is allegedly complicit in revealed, are small potatoes to what I believe may yet be uncovered. I believe that the Trump family has been run a lot like a crime family starting and the more they dig, there will be enormous revelations of impropriety and nefarious illegal activity uncovered. The question then, that all of our trading partners that Trump is currently battling in a trade war with are pondering, is that…will the trade war outlast Trump? Do they really need to make full concessions or just drag things out until Trump walks or is drug from the oval office? That question will weigh heavily on their trade war strategy.
This condition/situation is not lost on our trade negotiators so they are working aggressively to finish trade agreements while they still have authority to do so. USTR Lighthizer expressed concern about extended negotiations. They talk tough with more tariffs threatened, but they are not going to want to drag these talks out either for fear they will not be in office to end the trade war that they started. That would mean that we would have all gone through a whole lot of pain and misery for pretty much nothing. .
The White House would reportedly also like to renege on its promise to farmers of a second half tariff compensation check. Farmers have been mislead by this administration in so many ways it is astounding. Never been anything like it before.
So, the bottom line is that China would like to get this trade war over with so they could remove some economic uncertainty and help them avoid a recession turning into a depression. Trump would like to get it over with so that he can claim some credit while still in office. If Trump makes concessions it will not matter because he can sell literally anything to his base. If he is instead too hard on China then they may opt for the long view and out-wait his term in office which they can outlast regardless how long that is.
David Kruse is president of CommStock Investments Inc., author and producer of The CommStock Report, an ag commentary and market analysis available daily by radio and by subscription on DTN/FarmDayta and the Internet.
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