Trade truce does not necessarily mean trade peace. Despite recent agreements by the U.S. with China and its North American partners, we’re still a long way away from what was recently considered normal, and the risk remains all-too clear at this week’s Davos “After-Party.”
After a winning week for President Donald Trump’s trade agenda, investors turn their attention to the World Economic Forum, where the conversation will tilt heavily toward climate challenges and assembled journalists crouch poised to score any exchanges between the president and activist-sailor Greta Thunberg.
But the signing of a China trade deal and the Senate ratification of the U.S.-Mexico-Canada Agreement hardly mean that markets can cruise blithely forward this year without more tariff turbulence. Don’t confuse trade truce with trade peace, and don’t count on the deal signed Wednesday to last through the rest of the year. By now, it would surprise most observers if this president resists further engagement with China as the election heats up and Democrats accuse him of caving to Beijing.
More pressing is a series of contentious issues with Europe that will surely get litigated in the corridors of Davos. The president has already threatened tariffs on wine and cheese in response to France’s digital trade tax, a dispute now potentially involving 140 countries since the OECD took over the question of how to tax mainly U.S. tech companies that shift profits to low-tax jurisdictions. Meanwhile, a 15-year-old dispute over subsidies to Airbus and Boeing may trigger retaliatory tariffs from both sides. Recall that the president is still also officially contemplating tariffs on European automobiles—allegedly on national security grounds.
Back to Asia, Washington is also negotiating the second phase of a trade deal with Japan, where the exchanges over car exports have often included tariff threats.
TRADE POLICY UNCERTAINTY INDEX (FED) 3 MO. AVG. DEC: 137.86
Source: Cornerstone Macro, Federal Reserve.
Uncertainty is lower than a year ago, according to an index concocted by the Fed to measure trade worries in media reports and earnings call transcripts. But we are still far from what was only recently considered normal. Strong consumers, steady earnings and cheap money may continue to drive market returns for now, but the cloud over capital spending lingers as firms scramble to mitigate tariff risks.
The good and the great of Davos will surely take their own measures of the Phase One China deal.
In fact, we will never really know if the president’s bare-fisted engagement with China delivers benefits that exceed the price of getting us to here—both immediate costs of tariffs and long-term disruption to the global trade understandings. Much will depend on what happens next. Did this confrontational round help set the relationship on a more cooperative course, moderating China’s most disruptive practices and establishing a better way to resolve disputes?
In many ways, the two sides now face even more nettlesome issues around Chinese government subsidies, cyber activity and technology supply chains. And they must deal with them having fewer relevant policy tools and even less mutual trust. There is no way of knowing if the more patient approach of previous administrations might have delivered more.
Critics see the Trump trade strategy as a costly experiment that badly hurt American farmers, violated rules of the World Trade Organization and delivered Chinese commitments that remain either unenforceable or firmly in line with what Beijing was planning anyway. Certainly, the language on currency manipulation is almost identical to what China has already said, and measures to open the financial sector have been underway for years.
The Administration spins the deal as a substantial step forward. There are specific commitments to ease burdens on U.S. agricultural exports, to crack down on intellectual property theft and to address disagreements through a new bilateral mechanism.
"Strong consumers, steady earnings and cheap money may continue to drive market returns for now, but the cloud over capital spending remains as firms scramble to avoid tariff risks."
Of course, it’s unfair to expect the president can solve all the problems in a single deal, and getting even previous commitments on paper isn’t a bad thing. The Administration also insists that its new enforcement mechanism will be more effective than all the previous designs for bilateral consultations because it can deploy fresh U.S. tariffs.
But that also highlights the risks for markets.
Rather than define new rules of behavior that strengthen global markets, as most trade agreements aspire to do, this deal is narrowly transactional and not terribly balanced. By one count, the English version enumerates 105 times where “China shall,” 60 instances of “the Parties shall,” and only five mentions that “the United States shall.” It also includes a sales ticket for $200 billion in Chinese purchases over the next two years that will likely just divert orders from elsewhere.
China was dragged into this deal kicking and screaming and has delivered relatively modest commitments. Meanwhile, key Chinese leaders have likely learned they cannot count on the U.S. as a partner for its long-term growth plans.
It doesn’t feel like we are headed for a period of great cooperation. Liu He, China’s top trade negotiator, may put a different spin on things as he leads the Chinese government’s delegation to Davos. But don’t bet on it.