THE TICKER

Spare a thought for the Trump team arriving in Beijing today. They’re aiming to forge a breakthrough trade agreement with their Chinese counterparts, but the odds are stacked heavily against them and appear to be getting longer by the hour. 

The senior economic advisers don’t agree among themselves on their approach. The attitudes of the six top officials range from Treasury Secretary Steven Mnuchin’s Wall Street-bred accommodation to trade czar Peter Navarro’s hard-line hawkishness.

They face an arguably insurmountable challenge seeking to curb the Chinese march toward mastery of high-tech industries at any cost, embodied in the state-directed “Made in China 2025” program. And they are launching into the talks as both sides dial up the pressure, with the administration moving to restrict the sale of Chinese telecommunications equipment in the United States and the Chinese canceling orders of American-grown soybeans. 

“Regardless of their capabilities, what chance do they have of altering Chinese policy that’s so deeply embedded culturally and politically?” National Bureau of Asian Research President Richard Ellings says. “We have to be modest in our expectations.”

President Trump signaled the outcome won't damage his relationship with Chinese President Xi Jinping: 

Trump has fixated on the record $375 billion trade deficit with China. He has said Beijing must reduce its surplus by $100 billion, a demand the Chinese have rejected. But the true prize for Xi and his regime is realizing Made in China 2025, an industrial policy that seeks to transform that economy into an advanced manufacturing powerhouse. It identifies 10 industries in which the Chinese aim to dominate, including robotics, aerospace, electric vehicles, artificial intelligence and biotech. 

“The entire focus on getting technology from foreign sources, by hook or by crook, is baked into the Chinese system,” Information Technology and Innovation Foundation President Robert Atkinson says. “That’s the juggernaut that is China right now.” 

Ellings points to three conditions fueling the Chinese push — and ravaging American claims to the protection of its technological know-how in the process:

  • A newly empowered dictatorship that’s “not about to relinquish control of anything"
  • “A momentum in terms of industrial policy that is beyond a Westerner’s ability to appreciate"
  • And “a cultural proclivity to obtain whatever you can from wherever… There’s no high standard for what we call intellectual property.”

The Chinese say they'll refuse to deal on the matter, per the AP: "Striking an adamant tone, the state-run Global Times newspaper said Thursday in a commentary that it’s 'our sovereign right to develop high-tech industry and it is connected to the quality of rejuvenation of the Chinese nation. It will not be abandoned due to external pressure.'”

An internally-divided American team with a hazy sense of its own goals isn’t in a position to put much of a dent in that long-range plan over the course of two days. “The Chinese may try to mollify officials by meeting only the most modest of their trade demands,” The New York Times’s Ana Swanson and Jim Tankersley write. “That could include agreeing to buy additional American products to lower the trade surplus with the United States, reviving old economic dialogues between the countries, or cracking open some domestic markets to foreign competition — but only those where Chinese companies are already securely dominant. In general, China appears set to take a hard line.” 

Some American business interests — until recently a force for appeasement, in the interest of preserving access to the rapidly growing Chinese market — want the Trump team to take a hard line, too. The Business Roundtable said in a statement that the administration’s objective should be securing “lasting economic reforms” that foster fair competition. “Negotiations that focus on temporarily reducing the trade deficit would make this a wasted effort,” the lobbying group representing top CEOs said. “Working in coordination with our allies, the U.S. should set deadlines on those economic reforms and outline the consequences China would face if reforms aren’t made.”

But others are registering rising alarm about the danger of an escalating trade conflict rattling global supply chains and markets. The Times reports that the National Association of Manufacturers has been pressing the administration to try to strike a bilateral trade agreement with China. And The Washington Post’s David Lynch writes that multinational companies “such as Electrolux, Kansas City Southern, Ingersoll Rand and Whirlpool have addressed trade-related uncertainties on quarterly earnings calls. Jonas Samuelson, chief executive of appliance maker Electrolux, told investors last week that tariffs were contributing to price increases on raw materials that would cost the company about $200 million this year. Whirlpool chief executive Marc Bitzer warned of ‘uncertainty regarding potential future tariffs and trade actions’ three days earlier.”

In a note to clients on Wednesday. Goldman Sachs wrote that some “additional market-disruptive policy moves regarding US-China trade seem likely…. We believe a substantial breakthrough at this meeting is unlikely as the issues the US has raised—intellectual property policies, technology transfer, and the ‘Made in China 2025’ strategy, in particular—are not the type of technical trade issues that can be resolved quickly.”

The Cybersecurity 202 is coming to your inboxes May 9. Derek Hawkins will break down the latest news on election security, major hacks and what lawmakers are planning to do about it all in the newest member of our 202 franchise. Sign up here.

MARKET MOVERS

Fed holds steady. The Post's Heather Long: "The Federal Reserve kept interest rates unchanged Wednesday but hinted that more rate hikes are probably coming later this year if the economy continues to strengthen. 'The labor market has continued to strengthen and ... economic activity has been rising at a moderate rate,' the central bank wrote in a statement Wednesday. For 2018, the Fed predicts the U.S. economy will keep expanding at a 'moderate' pace, hiring will remain strong, and inflation will “run near” the central bank's 2 percent target, a notable change after years of low inflation."

Stocks shrug. WSJ's Amrith Ramkumar and David Hodari: "U.S. stocks edged lower Wednesday after the Federal Reserve left interest rates unchanged but reiterated plans to continue raising them gradually in response to firming inflation. The Dow Jones Industrial Average closed down 174 points, or 0.7%, to 23925 in a fourth straight session of losses. The S&P 500 declined 0.7%, and the Nasdaq Composite added 0.4%. All three indexes closed near their lows of the session. Worries about the possibility of the Fed raising rates faster than expected have contributed to the shakiness in markets in recent weeks."

Deficit grows. Bloomberg's Saleha Mohsin and Liz McCormick: "Trump’s massive fiscal stimulus plans are adding to the U.S. debt overload and forcing the government to drive up bond issuance as the Federal Reserve shrinks its balance sheet. The Treasury Department will boost the amount of long-term debt it sells to $73 billion this quarter, lifting the auction sizes of coupon-bearing and floating-rate debt again after doing so last quarter for the first time since 2009, the agency said Wednesday in its quarterly refunding announcement. The country’s debt load is seen spiraling compared with the rest of the world, with forecasts showing that in five years it will have a bleaker outlook than even Italy, the perennial poor man of the Group of Seven industrial nations."

Payroll gains exceed 200k again. Bloomberg's Sho Chandra: "Companies in the U.S. added more than 200,000 workers for a fifth straight month in April, signaling the job market remains strong, according to data released Wednesday from the ADP Research Institute... The results are a positive sign for private payrolls, which will be released Friday as part of the monthly jobs report by the Labor Department, and suggest the jobless rate will continue to decline."

Ten-year Treasury yields’ rise above 3% for the first time in four years last week confirmed the end of a decade of unprecedented monetary stimulus. But central banks’ vast power over markets may not be over.
WSJ
The earnings report started optimistically enough, with Elon Musk forecasting an end to Tesla Inc.’s cash-burning days after blazing through another $1 billion last quarter.
Bloomberg
"I just didn't think it had anything like a real conference call," CNBC's Jim Cramer says.
CNBC
TRUMP TRACKER

TRADE FLY-AROUND: 

Tech cos to Trump: We need Chinese workers. The Post's Danielle Paquette: Technology giants are urging Trump to leave what they call a crucial talent pool out of the trade discord: Chinese workers. Dean Garfield, chief executive of the Information Technology Industry Council, which represents Google, Facebook, Apple, Amazon and other companies, said its members are alarmed at reports the White House is considering a ban on Chinese citizens conducting high-tech research at American universities and businesses. The firms rely on skilled foreign labor to develop new products, Garfield said. 'We’ve heard from many, if not all, of our members,' he said, 'that steps to limit access to talent have a direct negative impact on their ability to run their businesses.'"

U.S. cuts off Brazil talks. Reuters: "Brazil on Wednesday contradicted a United States announcement that the two countries had reached a deal on a permanent exemption from steel and aluminum import tariffs, saying the Trump administration had unilaterally cut off talks. Representatives for Brazil’s industry decried U.S. negotiation tactics, which the head of the association for aluminum producers, Milton Rego, called 'Al Capone-like.' 'You get better results by pointing a gun to the head,' he said."

EU says it won't negotiate under threat. Reuters: "European Commission President Jean-Claude Juncker said on Wednesday the European Union will not accept threats in talks with the United States to secure a permanent exemption from U.S. import tariffs on steel and aluminum... 'We will continue our negotiations with the United States, but we refuse to negotiate under threat,' Juncker said."

As it prepares to face off against China. Bloomberg: "Europe is set to tighten controls over foreign investment, a sign of growing wariness of China’s efforts to use its $11 trillion economy to become a dominant global power... Europe is waking up to the risks and not just the benefits of inward investment, predominantly from China. A Bloomberg audit found that China has invested at least $318 billion in Europe over the past decade, from critical infrastructure to high-tech companies -- more than in the U.S. over the same period."

MELTDOWN WATCH: 

Giuliani: Trump repaid Cohen for Stormy hush money. The Post's Devlin Barrett, Robert Costa and Josh Dawsey: "Rudolph W. Giuliani, the former New York mayor and a recent addition to President Trump’s legal team, said Wednesday night that Trump made a series of payments reimbursing his attorney, Michael Cohen, for a $130,000 settlement with an adult-film actress — despite Trump’s assertion last month that he was unaware of the payment... Giuliani said it was his understanding that repayment from Trump came in a series of transactions after the election that he believes were completed in 2017 but could have included a reimbursement in 2018... Michael Avenatti, an attorney for Daniels, said Giuliani’s comments were an indication of campaign finance violations and possibly bank fraud and money laundering."

Trump expanded on the revelation in some Thursday morning tweets:

Cobb out, Flood in. The Post's Bob Costa, Carol Leonnig and Josh Dawsey: "Trump’s growing desire for his lawyers to more forcefully counter the ongoing special counsel investigation drove yet another shake-up of his legal team on Wednesday, putting the White House on war footing with federal prosecutors examining Russian interference in the 2016 campaign. White House lawyer Ty Cobb, who repeatedly urged cooperation with special counsel Robert S. Mueller III and assured the president such a strategy could shorten the investigation, announced he would leave his post at the end of the month. In his place, Trump tapped Republican defense attorney Emmet Flood, who brings experience wrangling with investigators when he represented President Bill Clinton during House proceedings to impeach him."

MONEY ON THE HILL

Rubio's Take Two on taxes. The Post's Jeff Stein: "Sen. Marco Rubio (R-Fla.) on Wednesday launched a fresh attack on Republicans' corporate tax cuts, but this time, he couched the criticisms in broader praise of the GOP tax law overall. Writing in the conservative National Review, Rubio reiterated his skepticism that the corporate tax cuts alone would deliver large-scale benefits to workers — building out his comments from last week in which he said there was “no evidence whatsoever” that the cuts' benefits were significantly helping workers. Rubio wrote that the law's changes to the corporate tax code should have done more to prioritize incentives for investment, which he said would translate to more jobs and bigger paychecks for workers."

Hollywood's tax cut windfall. Bloomberg's Ben Steverman: "The tax overhaul doles out windfalls to the producers and film financiers who control the entertainment industry. It slashes tax rates, especially on overseas profits that are the lifeblood of Hollywood, and changes accounting rules in a way that could attract more investment dollars to show business. With clever tax planning, A-list celebrities and directors could also benefit, especially by using a special break intended for business owners... Under the old tax regime, producers could deduct the costs of large projects only gradually over the many years that they typically bring in revenue. In the final version of the tax bill, total production costs, which can exceed $100 million for big-budget blockbusters, can be deducted as soon as a new product is released to the public."

In New York, meanwhile, employers are down on the SALT workaround. WSJ's Richard Rubin and Mike Vilensky: "New York state lawmakers found a clever way for employers to help their workers circumvent a new $10,000 federal cap on state and local tax deductions. Employers, however, so far aren’t crazy about it. The idea, which became law last month, creates a new optional payroll tax that shifts the state and local tax deduction from individuals who can no longer fully take it to businesses that can. Employers are worried about compliance costs, interactions with union contracts, complexity across state lines and the difficulty of explaining to workers how a plan that might lead to smaller pay raises still puts more money in their pockets."

Koch groups sell the tax cut. Bloomberg's John McCormick: "The bulk of the $20 million the Koch network is spending to promote the tax cut—roughly equal to what it spent on getting it passed—will be for television ads such as those AFP has run in Indiana, Missouri, and North Dakota targeting Democratic senators in states won by President Trump. But a key component will be door-to-door canvass campaigns. People are rarely eager to talk about their finances with a stranger, though as the midterms creep closer, and the odds of Democrats taking back the House of Representatives rise, Republican groups are beginning to mobilize around the tax cuts."

The law is inspiring another kind of activism – from shareholders. Reuters: "U.S. companies with more cash on their balance sheets thanks to tax reform are coming under greater scrutiny from activist investors, a top Goldman Sachs investment banker said this week. Some 73 campaigns by U.S. and European activist shareholders were launched in the first quarter of 2018 against the boards of companies with market capitalization exceeding $500 million, the highest quarter on record, according to data from Lazard Ltd."

The problem with Bernie's job guarantee. WSJ's Greg Ip: "Vermont Sen. Bernie Sanders, a Democratic presidential candidate in 2016 and likely again in 2020, is drafting legislation that would guarantee a job to anyone who wants one, at $15 an hour plus benefits... To hire all the official and unofficial unemployed and half the involuntary part timers at $15 an hour plus $3 an hour for benefits would cost around $450 billion, or 2.3% of gross domestic product. The actual cost could be much lower... According to the Economic Policy Institute, 39% of the workforce, some 54 million people, now earn $15 an hour or less. All would have an incentive to quit and join the federal program... Potentially millions of workers would end up on the federal payroll instead of in the private sector."

GOP divide on banks and guns heads to Texas. Dallas Morning News's Tom Benning: "Republican lawmakers are locked in a policy standoff over whether to punish big banks like Citigroup and Bank of America for curtailing ties with the gun industry in the wake of recent mass shootings. That divide holds true even in gun-friendly Texas, which plays host in Dallas this week to the National Rifle Association’s annual convention. Some Texas GOP'ers, such as Rep. Louie Gohmert of Tyler, want to cancel government contracts with financial institutions that are backing away from the firearms market. But others, while angry at the banks, are wary about intruding upon a private entity’s business decisions."

PowerPost
Lawmakers are eager to change the way Republicans do business on Capitol Hill, and several are openly suggesting a larger leadership shake-up may be warranted.
Mike DeBonis
Which party controls the House next year is still uncertain, but this much is clear: Someone other than Texas Republican Jeb Hensarling will hold the gavel on the Financial Services Committee.
American Banker
POCKET CHANGE

Goldman opens Bitcoin trading operation. NYT's Nathaniel Popper: "Goldman Sachs, perhaps the most storied name in finance, is bucking the risks and moving ahead with plans to set up what appears to be the first Bitcoin trading operation at a Wall Street bank. In a step that is likely to lend legitimacy to virtual currencies — and create new concerns for Goldman — the bank is about to begin using its own money to trade with clients in a variety of contracts linked to the price of Bitcoin. While Goldman will not initially be buying and selling actual Bitcoins, a team at the bank is looking at going in that direction if it can get regulatory approval and figure out how to deal with the additional risks associated with holding the virtual currency."

Citi eyes Saudi expansion. Reuters: "Citigroup is considering seeking a full banking license in Saudi Arabia as Western banks aim to capitalize on Saudi economic reforms, with rival HSBC announcing it has won mandates for several privatizations in the kingdom More than a dozen foreign banks have licenses to operate branches in Saudi Arabia, battling for business resulting from the kingdom’s efforts to itself off reliance on oil revenues."

The Switch
The firm said it had lost clients because of revelations in March that it had improperly obtained the personal information of millions of Facebook users.
Tony Romm and Craig Timberg
DAYBOOK

Today

  • The American Enterprise Institute holds a conversation on President Trump’s strategy in the Americas.
  • The National Economists Club holds an event.
  • The 2018 Consumer Financial Protection Bureau Research Conference begins.
THE FUNNIES

From The Post's Tom Toles: 

BULL SESSION

As the many Russia investigations continue, Trump has gathered a group of controversial lawyers to represent him, both from within the White House and outside it.

Stephen Colbert on Trump's threat to "get involved" with special counsel Robert Mueller's investigation:

Cambridge Analytica announced it would cease operations and declare bankruptcy following the data scandal with Facebook: