International Trade and Global Business

 

A Trade Deal Before Christmas?

A Trade Deal Before Christmas?

Two weeks shy of the deadline when additional tariffs are imposed on a new set of Chinese imports, unofficial bets are getting made on whether an 11th-hour deal will save the day.

What's at stake is $130 billion worth of goods, mostly consumer items like smartphones, that will hit US consumers square in the pocketbook. President Trump had delayed the tariffs until now to cushion the sticker shock until after holiday shopping. But many of these items are year-round staples, so angry at the checkout stand can still transfer to anger in the election booth one year hence.

Therefore, the US President may not sign legislation punishing individual Chinese citizens and entities if they are involved in crackdowns on protesters in Hong Kong. The troubles there have shadowed trade negotiations for months but have now burst into full view as demonstrations became more violent and Congress acts.
President Trump faces a dilemma: side with the protesters and risk blowing up the negotiations or don't sign the bill and proclaim his friendship for China's President Xi Jinping. He could also do both and has already done part B of the second option.

If he vetoes the bill, Congress will no doubt override him, but the US President can still claim to be friendly towards President Xi, hoping it will help save a deal.

China’s President also has a dilemma because his government has already condemned the legislation as meddling in China's internal affairs, never mind that the fate of Hong Kong and its people is of deep concern to many more countries than the US. He also wants a deal but continues to push hard for one that makes as few concessions as possible. No trade deal + new legislation on Hong Kong = bad news for President Xi Jinping.
 
Friends in need?
 
The U.S. President may cling to a friend, but he may enter election year with angry farmers wondering why they're getting insufficient subsidies while their once best market remains dried up for another growing season and may never come back. Corn farmers are especially incensed that the administration's support for the energy sector means less demand for ethanol, an important corn-based additive in gasoline. Several small processing plants near the cornfields are sitting idle, causing lost jobs and rising inventories of unsold corn.
 
Dramas are occurring on multiple stages, creating centrifugal forces that add to the difficulty of getting an agreement. In the event a modest agreement is reached, the same dramas will start up again as the parties attempt to build on an agreement by tackling structural issues like China's subsidies for state-owned enterprises, the validity of the enterprises themselves, and China's announced plans to dominate high tech industries of the future. Bring a comfortable chair to those negotiations.
 
To get to a credible first step agreement of any kind, the parties and key personalities must want it enough to tune out the noise and multiple sources of displeasure. Can President Xi compartmentalize Hong Kong? Can President Trump realize that while tariffs may have brought the Chinese to the bargaining table, they were never enough to get the desired bargain and may boomerang on the self-described tariff man?
 
One likely outcome is to suspend the Dec 15th tariffs, declare progress being made, and push the talks into next year. An even better solution would be a phase one agreement signed before Christmas.
 

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