Angst Down, Calm Up

In the relatively short period of a few weeks the mood here has changed from somewhere between gloom and panic, to somewhere between calm and optimism. For several reasons, first among them the President’s tweets that progress is being made in negotiations to end the trade war with China. Indeed, so promising are the results of a mid-level meeting of the parties in Beijing that cabinet-level meetings in Washington between China’s vice premiere Liu He and US trade representative Robert Lighthizer are now deemed likely.

The Chinese have agreed to allow Elon Musk to build a $5 billion plant east of Shanghai to produce his Teslas for sale in China’s market, bypassing the country’s standard 15% tariff on imported vehicles. It is negotiating with Exxon Mobil to approve a $10 billion petrochemical and liquified natural gas (LNG) facility. In neither case will the American company be require to have a Chinese partner.

The Chinese have also agreed to four US demands: They will

  • increase purchases of American products, most notably soybeans and energy;
  • allow increased access to their markets by American firms;
  • protect American intellectual property; and
  • reduce subsidies to Chinese firms that compete with US companies.

There is a small problem with these concessions. The first is not a concession: the Chinese need American soybeans and (LNG). And the other three are identical to those China made in 2001 when, based on those promises, it was admitted to the World Trade Organisation. Since then UBS Group of Switzerland is the only foreign investment bank the People’s Republic has allowed to own a majority interest. China has also been stealing US IP valued at as much as $600bn per year. As for subsidies, it has yet to provide the WTO with the promised list of its subsidies. Indeed, instead of reducing them, China’s president, XI Jinping, has announced plans to lavish subsidies not only on his ailing steel and other 20th century industries, but to start pouring government funds into the industries of the future in pursuit of world dominance.

Lighthizer and his partner-in-protection, Trump’s trade adviser Peter Navarro, know this, and will be discussing with He how China’s promises can at last be enforced. That will be a more difficult meeting than the mid-level one at which the 2001 promises were repeated. But it might not fail if Trump and Xi have anything to say about it. And they do. Both politicians have compelling domestic reasons to strike a bargain. The Communist Party’s legitimacy depends on its ability to uphold its end of the bargain with its people: trade your liberty for prosperity and material well-being.

At his point, Xi is being criticised for the sad state of his country’s economy. Retail sales last year grew, but at their slowest rate in 15 years; lay-offs are up; footsteps echo on the streets of empty cities; corporate insolvencies in 2018 were up 60%; unpaid credit card balances of more than six months are up 33%; debt levels are unsustainable, yet to prevent a further shrinkage of the economy Xi and the central bank are loosening fiscal policy, making credit cheaper by injecting $218bn into the banking system, 30% of which premier Li Keqiang has ordered be allocated to small private businesses at low rates.

Trump is presiding over a much healthier economy, with unemployment virtually non-existent. But the trade war is starting to hurt his important constituents – farmers. In the last quarter of 2016 they shipped 18mn tonnes of soy beans to China; in the same period last year a mere 300,000 tonnes. The longer the trade war lasts, the more likely is it that America will lose markets permanently to the sources of supply China is now lining up. Tariffs also are starting to drive up the costs of American manufacturers, with many planning to follow the example of Harley Davidson (motorcycles) and relocate to countries not facing Chinese retaliation so they can remain competitive in global markets. So, like Xi, Trump wants a deal, and if it takes a dollop or two of fudge to get one that he can sign and still claim victory without causing Xi to lose face, he will uncap the presidential pen.

That prospect is not the only thing that has brought smiles to the faces of investors and consumers. Jay Powell, chairman of the Federal Reserve’s board of governors, has – how to put it? – backed off his plan to raise interest rates twice this year. He now professes “patience” while the Fed determines whether forecasts that the economy will slow are to be taken seriously. Whether this was in response to pressure from the tweeter-in-chief, as cynics contend, or to a wave of reductions in forecasted growth rates, cannot be determined. Either way, markets calmed down.

A final uplifting factor was proof that, as the late Charles Krauthammer put it, the guardrails are holding – the institutional constraints on a president who prefers intuition to fact-based decision-making remain. The policy apparatus converted the president’s surprise order for an immediate withdrawal of American troops from Syria, into an orderly pullback once ISIS is defeated and allies have time to adjust.

You might ask: “What about the fact that 25% of government remains closed?” So far, the answer is that aside from Trump, who feels he needs a wall, or fence, or barrier to meet his obligation to secure the country, and the Democrats who consider a wall “immoral” and worse, a victory for the president with his base, the 800,000 hard-pressed federal employees who are temporarily laid off and will have to wait for their paycheques, No one else seems to care. The best guess is that every two weeks that the shutdown continues will temporarily knock 0.1%-0.2% off economic growth. Share prices have risen in the last five shutdowns, as in this one. Americans have become accustomed to watching their elected representatives disport themselves, the president attended by his courtiers, Democrats by a fawning media gaggle. They are not amused, but neither are they very worried.