Futures Set To Slide After China Balks At Pursuing “Broad Trade Deal”

For the past month, both Trump and his hawkish China trade advisor, Peter Navarro, have been repeating that they would only consider a “great” deal with China and would not even entertain a “small deal” with Beijing. Last week, Peter Navarro appeared on CNBC and said that despite the recently launched impeachment inquiry into Trump, “the probability of a great deal has not changed.”

. @realDonaldTrump “has steely resolve about standing up to China,” says W.H. trade advisor Peter Navarro on whether impeachment inquiry could impact trade negotiations. “The probability of a great deal has not changed.” pic.twitter.com/y8iOYS7HtA

— Squawk Box (@SquawkCNBC) September 30, 2019

Then just last Friday, Trump told reporters that “we’ve had good moments with China. We’ve had bad moments with China. Right now, we’re in a very important stage in terms of possibly making a deal. But what we’re doing is we’re negotiating a very tough deal. If the deal is not going to be 100% for us, then we’re not going to make it.”

So unless something has drastically changed in the past day or two, the probability of a trade deal being announced next week when China’s high level delegation arrives in Washington has just collapsed following a Bloomberg report that China is balking at the “broad trade deal” pursued by President Trump.

In meetings with US visitors to Beijing in recent weeks, senior Chinese officials have indicated they are “increasingly reluctant” to pursue a “great deal” as the range of topics they’re willing to discuss has narrowed considerably, Bloomberg’s sources reported.

Specifically, Vice Premier Liu He, who is leading the Chinese delegation in high-level talks that begin Thursday, said “he would bring an offer to Washington that won’t include commitments on reforming Chinese industrial policy or the government subsidies that have been the target of longstanding U.S. complaints”, effectively eliminating the possibility of even a token deal being announced purely for optical purposes.

Why Beijing’s sudden change of track? Perhaps it is the result of China sensing blood now that Trump is embroiled in an impeachment inquiry; and with Trump eager to preserve his reelection changes, conventional wisdom has telegraphed that the US president would be willing to do anything to keep the US economy from sliding into recession, or a steep drop in the US stock market. Both of those would – in principle – require Trump to concede and end the trade war, or else risk a backlash at the ballot come next November.

As such, Beijing is now confident that it has all the leverage and can once again dictate the terms of a trade non-deal.It also explains why China’s latest “offer” would take one of the Trump administration’s core demands off the table.

As Bloomberg notes, “it’s emblematic of what analysts see as China’s strengthening hand as the Trump administration faces an impeachment crisis — which has recently drawn in China — and a slowing economy blamed by businesses on the disruption caused by the president’s trade wars.”

Of course, Trump remains stoic as people close to the Trump administration say the impeachment inquiry isn’t affecting trade talks with China, and “any attempt to portray anything different is an attempt to weaken the U.S. hand at the negotiating table and, they argue, would be a miscalculation by the Chinese.”

And yet, that’s precisely the attempt that China is about to make, indicating that this week’s negotiations will either result in no deal, or Trump caving to China’s revised demands.

Of course, it’s not that simple: on one hand, China has its hands full with the ongoing Hong Kong protests which despite Trump’s “soft touch” so far, have refused to go away, and with every passing day, they threaten Xi Jinping’s public perception as a quasi-despotic and undisputed ruler of China, thereby weakening his own administration. Then there is the extremely important topic that continues to get virtually no media coverage: the soaring price of Chinese pork as a restul of pig ebola, which has resulted in growing anger among hundreds of millions of protein-starved Chinese.

if that wasn’t enough, China was also recently drawn into the Washington drama after Trump last week called for a Chinese investigation into his Democratic rival Joe Biden and the former vice president’s son, moments after threatening another escalation in the trade spat. While Trump has insisted that there’s no linkage, the president’s latest comments suggest why Chinese leaders, already frustrated with what they see as the president’s impetuous conduct in the trade talks, may see room to take advantage.

China’s leadership “are interpreting the impeachment discussion as a weakening of Trump’s position, or certainly a distraction,” said Jude Blanchette, an expert on China’s elite politics at the Center for Strategic and International Studies.

“Their calculation is that Trump needs a win” and is willing to make compromises on substance as a result, he said.

Needless to say, a compromise for Trump at this point is a double-edged sword, as it would be seen as a major walk back after two years of increasingly escalating tariffs, leading to great losses for US farmers. Discussions have focused on what U.S. administration officials view as a three-phase process: the sequence would involve large-scale purchases of U.S. agricultural and energy exports by China, implementing intellectual-property commitments China made in a draft agreement this year and, finally, a partial rollback of U.S. tariffs.

It now appears that China wants to short-circuit the process, and – at best – will agree to some generic promise to boost token imports from the US (mostly of pigs) without committing to anything else.

To be sure, hopes have always been limited that China would agree to give up its economic model in a trade deal with the U.S., Bloomberg notes even though a draft agreement reached in April before talks broke down included several substantive commitments from China to abandon the sort of industrial policies the Trump administration and others before it have complained about.

That draft focused on securing more transparency from China on the extent of its subsidies. It included a commitment essentially to disavow Made in China 2025, Xi Jinping’s plan for Chinese domination of key 21st century industry such as artificial intelligence, robotics and electric vehicles, though it lacked a schedule for removing Chinese government subsidies that fueling the plan.

Commenting to Bloomberg, former U.S. Treasury representative in China, David Dollar, now at the Brookings Institution, said China’s push to narrow the discussions is “more evidence that both sides are hardening their positions on a broader deal.”

The U.S. and China increasingly have reasons to strike a “mini deal” and avoid an escalation, he said. China needs agricultural products such as pork that Trump wants it to buy so he can placate American farmers. And even people in the White House concede there’s a U.S. incentive to hold off on further tariffs to avoid a worsening economic slowdown going into 2020.

“It’s a funny kind of negotiation where both sides’ so-called concession is something that they need,” Dollar said.

At the end of the day, however, it’s all about reading – and misreading – one’s opponent, and if China is making a miscalculation in escalating its demands ahead of the week’s trade talks, and if Trump balks at China’s revised proposal, then not only are trade talks off indefinitely once again, but the bigger problem for Trump is that stocks will tumble, and unless the Fed promptly cuts rates or launches QE4, the president will find it increasingly difficult to boast of his “financial” accomplishments by telling his opponents to “look at the S&P500.”

Then again, a market crash is precisely what the Fed would need to launch QE4, which may suggest that whether it’s 4-D chess or not, Trump is just one step ahead of his Chinese opponents on this one.