Donald Trump’s art of the deal is taking its toll on US and Chinese stock markets
Richard Harris says Trump’s desire to reduce the trade deficit with China may be justified, but his chaotic negotiating style is not
Rarely can two sides that have reached agreement be so far apart. US President Donald Trump started the trade fight emboldened by his victory in reducing US taxes – and to many he had a point. The trade deficit of US$335 billion is huge when you consider that total US exports to China are just US$130 billion.
There is no doubt that the United States has a rampant hunger for Chinese products. And it is equally true that the Chinese people have a huge desire for things American and European to satisfy an enriched population’s demands for the high-quality end of the Chinese consumer economy.
Watch: Foxconn said it will help balance the trade deficit between the US and China
To allow the free ingress of “foreign” products and services in the early days of China’s development would have totally swamped that market. If you think Amazon, Apple, Cisco, Facebook and Google are big, think of how huge they would be if the Chinese government had not blocked their expansion and encouraged the rise of Alibaba, Baidu, Huawei, Tencent, Xiaomi and ZTE. That was a Chinese government policy that, at a stroke, lifted China into both super-economy and superpower status.
But cutting China some slack as a developing economy is not the same as standing aside when Chinese companies are financially able to buy the commanding heights of the US and everybody else’s economy. Trump coming into the game late sees China “raping” the US and being a currency manipulator. Yet his wild calls to open up the Chinese economy fall on a lot of sober ears, not only in the US but also in Europe.
They also fell upon the ears of President Xi Jinping who has announced a further opening of the Chinese economy. Sensible national leaders know that beggaring one’s trade partners is only going to hurt one’s own interests longer term – look at how the Saudi authorities manage the oil price both up and down.
Western countries, however, have deeper issues of concern than merely trading – they are also worried about the protection of intellectual property and alleged cyberattacks, and seek the same free commercial and regulatory entry into the Chinese economy for foreign businesses that Australians, Europeans and North Americans allow into theirs.
Watch: Xi Jinping reveals economic plans at Boao Forum
The trade negotiations that took place last week were attended by the highest-level officials of both governments who agreed to suspend the imposition of tariffs. The devil was very much in the detail. The communiqués from each camp did not agree. The Chinese would not confirm the US claim of an increased purchase of US$200 billion of US goods and services. Chinese Vice-Premier Liu He described the deal to reduce the US trade deficit as a “win-win choice” but warned that structural changes to the Chinese economy would take time.
In the midst of these negotiations, Trump would suddenly weigh in with unexpected comments. It was, in the words of British politician Geoffrey Howe, like “sending our opening batsmen to the crease only for them to find that before the first ball is bowled, their bats have been broken by the team captain”. Chinese negotiators who could not put a sliver of rice paper between them and their president must feel very destabilised in the face of confusion within the US ranks. The same man is currently negotiating with China about a meeting with North Korea’s Kim Jong-un while holding out an olive branch by rescuing ZTE, brought to it knees by US sanctions.
Markets jumped when it was announced that there had been a trade agreement and the Dow closed above 25,000 for the first time since March. Optimism faded as the differences of opinion emerged. Markets have been in two camps since the falls in global stock markets bottomed out at the end of March. Germany and the UK in Europe, and Japan, have seen leaps of over 11 per cent. On the other hand, the US (up around 5 per cent) and China (up a miserable 3 per cent) seem to have suffered together.
Watch: China and US put trade war on hold
The profile of a significant trade dispute between the world’s two largest trading partners has affected the US and Chinese stock markets, even though plans to apply US steel and aluminium tariffs on its friends in the European Union by the end of the month are still live. The markets know which outcome is more serious.
Trade skirmishes do not end; they just progress to an uneasy stability that becomes the new normal. Expect trade to be a constant area of bickering, friction and market uncertainty for the foreseeable future.
Richard Harris is a veteran investment manager, banker, writer and broadcaster and financial expert witness. www.portshelter.com