July 02, 2019

“China is going to be buying a tremendous amount of food and agriculture product,
and they’re going to start that very soon; almost immediately.”
- President Trump, 6/29/2019 press conference following the G20


In his press conference following the G20 meetings in Japan, President Trump announced that he was holding off putting tariffs on the  remaining $300+ billion of Chinese imports and that he is allowing U.S. tech companies to sell products to Chinese telecom behemoth Huawei in cases where there is “no great national security emergency.” The existing 25% tariffs on $250 billion of Chinese imports will remain in place as the negotiations resume. President Xi, who reportedly agreed to a meeting at the G20 only after receiving a phone call from President Trump, has apparently agreed to purchase agricultural products from U.S. farmers who have suffered from China’s retaliatory tariffs amid the trade war.

These developments bear a striking similarity to the aftermath of the Buenos Aires G20 Trump-Xi meeting in December of last year when President Trump announced a trade truce and resumption of negotiations that included releasing the stranglehold on ZTE (a mini version on Huawei), agreeing to not raise tariffs from 10% to 25% on $200 billion of Chinese imports, and China increasing agricultural, industrial, and energy purchases to reduce the trade deficit that the U.S. runs with China.

Since that time, trade negotiations progressed then fell apart, tariffs on those $200 billion of imports from China increased from 10% to 25%, and the Department of Commerce has placed Huawei, a company vital to China’s technology ambitions, on an “entity list” that restricts U.S. technology sales.

As one of China’s flagship companies, Huawei has both great practical and symbolic importance to China. President Trump likely    sees the ultimate status of technology sales to Huawei as an important bargaining chip, and in the post-G20 press conference indicated, “We’re leaving Huawei toward the end; we’ll see where we go with the trade agreement.” Top White House economic advisor Larry Kudlow added some clarifying comments on June 30th that only more common technology products would be sold to Huawei and that, “Anything to do with national security concerns will not receive a new license from the Commerce Department.” These comments came after congressional leaders, including republicans, expressed concerns about easing restrictions on Huawei – a company that is under indictment by the Justice Department for theft of trade secrets, wire fraud, obstruction of justice, and violating U.S. sanctions on Iran. In a sign of just how strong the support for a tough stance remains, Marco Rubio tweeted*, “If President Trump has in fact bargained away the recent restrictions on #Huawei, then we will have to get those restrictions put back in place through legislation.”

Huawei is just one among a list of issues in the trade negotiations. Yet, the Huawei saga illustrates the tension in the negotiations    and the difficult issues to overcome for a trade deal between the U.S. and China to be reached. Despite the similarities to last December, there are also meaningful differences between the negotiating environment today and that of the previous G20 meeting. A recent slowing of the U.S. and global economy could increase President Trump’s enthusiasm for making a deal. The U.S. presidential election is also no longer a distant consideration. President Trump may (or may not) feel a strong need to show something more from the trade war than tariff-filled coffers, and President Xi likely believes that President Trump’s zeal for tariffs is unlikely to be shared by the eventual democratic nominee. This reinforces the notion that Beijing is in no rush to make an agreement.

In the immediate aftermath of the meeting, markets responded favorably around the world. A positive reaction is no surprise given    the imminent tariff cloud has been lifted, but we fail to see how additional negotiations, with no definitive timeline, will materially boost business confidence in the short term. Yes, there will likely be further positive comments from negotiators on progress (true or not) as talks restart, but the path to trade war resolution remains difficult. This is particularly the case if the U.S. insists on China re-writing regulations and laws to ensure compliance to agreements on intellectual property protection and market access. China has drawn lines in the sand that seem less movable than President Trump’s positions, at least based on his recent conciliatory tone. On net, the case for pessimism seems just as strong as that for optimism. We’ve been here before, but history doesn’t necessarily have to repeat itself. Perhaps President Trump is sufficiently unconventional that it doesn’t have to rhyme either.

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