Hitting a stalemate with trade negotiations with China, 72-year-old President Donald Trump overplayed his hand, insisting that he could outlast China in a trade war. Refusing to reinstate language that specifies in Chinese law that copyright and patent infringements were illegal, U.S. China Trade Representative Robert Lighthizer rejected current terms of any trade deal. After negotiating for months protections against copyright and patient infringements, China Chief negotiator Liu He said China would not be disrespected by the U.S. or any other country He objects to creating Chinese laws to stop copyright and patent abuses, something that’s been going on for 20 years. When markets open tomorrow, the optimism will end, triggering short sellers to start betting against U.S. companies doing business in China. Trump kept telling himself that China needs to make a deal more than the U.S.
Trump’s insistence on pushing China to the brink has backfired with Chinese
officials saying that China would not bend to U.S. pressure. Asian markets sank realizing that the U.S.-China impasse has no end in sight. Last week, Trump’s Chief Economic Adviser Larry Kudlow said talks were “constructive,” prompting U.S. markets to rally. “We’re in terrific shape to change 20 years-plus of unfair trade policies with China,” said Kudlow. “This is a risk we should and can take without damaging our economy in any appreciable way,” denying that the trade war adversely impacts the U.S. stock market and economy. If Wall Street sells off, it could push the economy into a downturn, possibly recession, with U.S. GDP suffering. Kudlow repeats Trump’s talking points, unable to face reality that the trade war threatens the U.S. economy. Trump says the U.S. is in the best possible position to win the trade war with China.
Trump has more at stake than winning the trade war with China. Any economic downturn would give voter second thoughts about giving Trump a second term. “We’re right where we want to be with China,” Trump said, knowing that more market sell-offs could imperil U.S. Gross Domestic Product [GDP], but more importantly, send an otherwise fragile economy into recession in 2020, maybe sooner. “We would like to see these agreements in an agreement which is codified by law into China, not just a State Council announcement. We need to see something much clearer. And until we do, we have to keep the tariffs on,” Kudlow said. Trump’s been given bad advise by Kudlow and chief economist Peter Navarro, both hold hawkish views on China. China reacted harshly to Trump’s bullying tactics, stating with certainty that the Peoples Republic of China would not be bullied or disrespected.
Before the Trump team pushes the economy to the brink, they need to consider what happens if tariffs don’t go Trump’s way. “At no time will China forfeit the nation’s respect, and no one should expect China to swallow bitter fruit that harms its core interests,” said China’s Peoples Daily, the semi-offical government publication. Watching Asian markets sell off today, global markets anticipate fallout from a prolonged standoff. Trump and Kudlow’s optimism stemmed from the fact that China’s GDP has fallen well below it’s normal growth rate. Wall Street sell-off to discount share prices, anticipating a prolonged trad war. Upping tariffs on $325 billion more in Chinese goods to 25% could send markets into a tailspin, especially if China reacts in-kind, raising tariffs on U.S. products.
If China rejects U.S. trade deal, it’s going to take some high-stakes diplomacy at the next G20 summit June 28 in Osaka, Japan, the next change for Trump to meet with Xi Jinping. But given the current impasse, it’s unrealistic for Trump to expect Xi to pull a rabbit out of his hat. If Trump wants to resolve the trade impasse, Lighthizer needs back down from the current demands to force China to codify in Chinese laws rules against copyright, patent and trade infringements. When Trump meets Xi in Osaka, he needs to have worked out all the objections before the meeting. Based on Lighthizer and Kudlow’s positions, there’s little hope right now that Trump can turn things around. If he wants to end tariffs, he needs to consider the impact on global markets, especially the U.S. economy. There’s no magic in realizing that Trump can’t bully China into a trade pact that meets all U.S. demands.
Global markets are already convulsing around Trump’s expected tariff hikes which can only make a bad situation worse. Too many more sell-offs could plunge already fragile global markets into a downturn that could impact the U.S. economy. “Tariffs will make our country much stronger. Just sit back and watch,” Trump tweeted May 10, not realizing that China would not capitulate to more concessions. However China reneged on prior agreements, Trump must weigh carefully the impact on Wall Street and the U.S. economy. Another sell-off like the one in late 2018 could send the U.S. and global economies into a recession in 2020. Any economic downturn in an election years would no doubt sink Trump chances in 2020. When House Minority Leader Chuck Schumer (D-N.Y.) askedTrump to “hang tough” on tariffs with China, you know he’s hoping for bad economic times in 2020 to help Democrats.
