The next round of U.S.-China trade talks are hitting a skid before the two sides have even settled on the particulars.
Chinese officials, eager to prove they won’t negotiate under duress, are threatening to back out of talks if President Trump proceeds with the tariffs announced Friday on $200 billion in Chinese imports.
As the Wall Street Journal’s Jacob M. Schlesinger, Lingling Wei and Bob Davis reported Sunday evening: “The Chinese government over the weekend was finalizing plans for a top commerce ministry official to visit Washington later this week to lay the groundwork for a trip by Vice Premier Liu He the following week. Mr. Liu is expected to see [Treasury Secretary Steve] Mnuchin, and possibly Mr. Trump. But Chinese officials said that if Mr. Trump carries out his plans to announce the fresh tariffs early this week — as people familiar with his plans said over the weekend that he would — then those talks could get scuttled.”
The back-and-forth is the latest sign that even as the Trump administration moves to try to settle trade disputes with Canada, the European Union and Japan, it continues intensifying hostilities with the world’s second-largest economy. And it highlights how Washington and Beijing have entangled themselves in a dynamic that doesn’t allow either side much room to de-escalate: The Trump team is demanding concessions as the price for calling off new tariffs; Beijing won’t offer concessions unless the United States calls off the tariffs.
As Claire Reade, a former U.S. trade negotiator, told my colleagues Damian Paletta and David Lynch over the weekend: “For the near term, this combination of tactics seems to signal that unless and until China comes to the table with significant actions on the issues the U.S. is hammering, the U.S. will keep tariff pressure going … Talks without action won’t do the trick. The open question, of course, is how much action is enough and can China find a way to move that will be seen as being in its own interest, not kowtowing to the U.S.”
The intractability of the situation is convincing corporate executives that only direct talks between Trump and Chinese President Xi Jinping can solve it, Damian and David report. They could come face to face later this month at the United Nations General Assembly in New York — and they are set to meet in November on the sidelines of a G-20 in Buenos Aires.
Trump, in a tweet this morning, maintains his approach is working and used a new phrase to describe his approach, "Tariffed!"
Tariffs have put the U.S. in a very strong bargaining position, with Billions of Dollars, and Jobs, flowing into our Country - and yet cost increases have thus far been almost unnoticeable. If countries will not make fair deals with us, they will be “Tariffed!”— Donald J. Trump (@realDonaldTrump) September 17, 2018
In the meantime, the Chinese are looking for ways to keep pace with the administration’s escalating pressure.
The Journal reports that “some Chinese officials advising [their] leadership are proposing to step up the trade fight a notch by restricting China’s sales of materials, equipment and other parts key to U.S. manufacturers’ supply chains. Such restrictions could even apply to Apple Inc.’s iPhones, which are assembled in the mainland, officials said, without elaborating.”
Or as Lou Jiwei, a former finance minister and chairman of China’s sovereign wealth fund, put it Sunday at an economic forum, per the AP: “Only knowing the pain of fighting will stop the war and cause (the United States) to negotiate seriously.” Apple’s smartwatches, among a wide array of other consumer goods, including furniture, apparel and toys, are already set to be ensnared by the next round of U.S. tariffs.
Xi's government is drawing support for a confrontational approach from the Chinese middle class, a fact that could extend the hostilities, The Washington Post's Danielle Paquette reports from Beijing: “Analysts say Trump’s brash approach to try to win concessions from Beijing has provoked a public fury that could ultimately thwart his efforts. [Xi's] iron grip on power depends on healthy support from the nation’s exploding middle class, and now that middle class, angered with Trump’s escalating threats, expects China’s leader to respond with strength. This could make finding a compromise to end the escalation even more difficult.”
With official diplomacy sputtering, Wall Street executives are trying to fill the breach. “Senior Wall Street executives met in Beijing on Sunday with current and former Chinese officials and bankers at a hastily organized session to find ways to strengthen financial ties between the United States and China,” the New York Times’s Alexandra Stevenson, Kate Kelly and Keith Bradsher report. “On Monday, the group — which included executives from Goldman Sachs Group, Morgan Stanley and the Blackstone Group, the private equity firm, among others — planned to meet with Vice President Wang Qishan, the right hand man of Xi Jinping, the country’s leader.”
Blackstone chief Steven Schwarzman in particular has been playing a key role in trying to organize talks between Liu and Mnuchin, the Times reports. But the project has been an exercise in frustration for Wall Street so far. As Marshall Meyer, a Wharton School of Business professor, puts it to the Times, “What’s really surprising is that the connections that used to work, the formula that used to work, just don’t work at this point.”
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— Goldman shrugs off recession risk. Bloomberg's Simon Kennedy: "Goldman Sachs Group Inc. economists are proving more relaxed than Wall Street rivals about the risks of a U.S. recession come 2020. While Bridgewater Associates Inc. and JPMorgan Chase & Co. are starting to fret that tighter fiscal and monetary policies will create problems for the world’s biggest economy in two years’ time, Goldman Sachs sees just a 36 percent chance of recession over the next three years. That risk is below the historical average. [Goldman economists] reckon growth will stay robust and are less worried than they were that financial conditions had become unsustainably easy."
— Small stocks show strength. WSJ's Corrie Driebusch: “Technology giants get most of the credit for driving this year’s stock-market gains, but the quiet strength of smaller companies is a reason to keep betting on U.S. stocks. Signs of stock-market breadth are everywhere, investors and analysts say: Smaller-company stocks have climbed more than their larger counterparts this year. When all the companies in the S&P 500 are assigned an equal weighting, the index is still trading near records. And rising stocks have outnumbered decliners this year . . . These factors bode well for the stock market if its high-profile leaders like Amazon.com Inc., Google-parent Alphabet Inc. or Netflix Inc. falter, investors say. More than nine years into the bull-market run, many investors are watching for hints of a downturn. Some stumbles over the summer by popular tech stocks, along with recent declines in emerging markets, have stoked fears of a reckoning, but U.S. stocks appear resilient so far.”
— Exotic financial products make a comeback. Bloomberg: "The collapse of Lehman Brothers Holdings Inc. has consigned some financial products, popularized by their acronyms, to the dustbin of history. But investors’ appetite for high-yielding and relatively risk-free securities never went away. While the financial crisis permanently damaged the reputation of many esoteric, high-risk portions of the credit market, new products, some with more robust structures, have emerged. These days money managers are piling into leveraged loans, via securitized structures known as collateralized-loan obligations, and securities backed by consumer debt rather than mortgages. Even collateralized-debt obligations, blamed by many for triggering the 2008 financial and economic meltdown, are making a comeback."
— NAFTA crunch time, again. Bloomberg's Josh Wingrove: "U.S.-Canada trade talks are poised to come to a head this week, as negotiators bear down on their next deadline amid [Trump’s] threats to cut his largest export market out of the deal. High-level negotiations are expected to resume this week in a bid to reach a deal for Canada to remain in the three-nation North American Free Trade Agreement… Congress is pressing for Canada to be kept in Nafta, after the U.S. and Mexico struck their own deal last month. Time is running out to reach an accord that can be signed before Mexico’s president-elect takes office. There are no high-level talks scheduled Monday, and the middle of this week -- probably Thursday -- is considered the next deadline to reach a handshake deal that could be converted into legal text by the end of this month."
— Trade war burdens GOP candidates. WSJ's Joshua Jamerson: “When Texas Rep. Will Hurd attended a luncheon with a group of local CEOs here to update them on his activity in Washington, he paused when he got around to the subject of Nafta. The trade agreement with Mexico and Canada is a boon to the Republican congressman’s constituents along the border, and anxiety has grown about it since [Trump] began seeking to revamp it. . . . It’s a political challenge that has emerged in other competitive House races this year, which complicate the GOP’s ability to hold its House majority... In Minnesota, the administration’s trade battles are hurting farmers concentrated in the southern half of the state while appearing to help the GOP and iron miners in the north. In Kentucky, Republican Rep. Andy Barr has expressed concern about the effect of Mr. Trump’s tariffs on his constituents, who have been hit by retaliatory tariffs, including one on soybeans imposed by China.”
- “Schiff to special counsel targets: ‘Anyone who gets indicted by Bob Mueller goes down.’” Politico's Caitlin Oprysko.
- Brett Kavanaugh, Trump's Supreme Court nominee, is being accused by Christine Blasey Ford of sexually assaulting her three decades ago at a high-school party, writes The Post's Emma Brown. Ford is willing to testify before the Senate Judiciary Committee considering his nomination (Kavanaugh vigorously denies her account).
— Trump's wishful thinking on repatriated cash. The Wall Street Journal's Richard Rubin and Theo Francis: “U.S. companies have moved cautiously in repatriating stockpiled overseas profits in response to last year’s tax-law change, despite the Trump administration’s assertions that trillions of dollars would return home quickly and supercharge the domestic economy... The Wall Street Journal reviewed securities filings from 108 publicly traded companies accounting for the vast majority of an estimated $2.7 trillion in profits parked abroad, and asked each company what it was doing with the funds. In their filings and responses, they said they have repatriated about $143 billion so far this year.”
— Dimon praises Trump's record. The Washington Post's Steven Mufson: “JPMorgan chief executive Jamie Dimon backed away Sunday from the sharp criticism he leveled at [Trump] earlier in the week and said he was not planning to run for president himself. Appearing on ABC’s ‘This Week with George Stephanopoulos,’ Dimon was asked ‘what kind of grade’ he would give Trump just on the economy. ‘I’d say pretty good,’ Dimon said. ‘You know, when President Trump was elected, confidence skyrocketed, consumers, small business, large corporate and because pro-business, pro-competitive taxes, pro some regulatory reform — and that has helped the economy,’ Dimon told Rebecca Jarvis of ABC . . . Last week, Dimon had been asked whether ‘he could beat Donald Trump in a potential 2020 matchup.’ Dimon replied ‘I’m as tough as he is; I’m smarter than he is. I — I would be fine. He could punch me all he wants; it wouldn’t work for me; I’d fight right back.’ ”
— Amazon investigates bribery. WSJ's Jon Emont, Laura Stevens and Robert McMillan: “Amazon.com Inc. is investigating internal leaks as it fights to root out fake reviews and other seller scams from its website. Employees of Amazon, primarily with the aid of intermediaries, are offering internal data and other confidential information that can give an edge to independent merchants selling their products on the site, according to sellers who have been offered and purchased the data, as well as brokers who provide it and people familiar with internal investigations. . . . Amazon is investigating a number of cases involving employees, including some in the U.S., suspected of accepting these bribes, according to people familiar with the matter. An internal probe began in May after Eric Broussard, Amazon’s vice president who oversees international marketplaces, was tipped off to the practice in China, according to people familiar with the matter. Amazon has since shuffled the roles of key executives in China to try to root out the bribery, one of these people said.”
— Walmart reaches New York. The New York Times's Michael Corkery: “Walmart’s e-commerce business, Jet.com, is leasing a 205,000-square-foot warehouse in the Bronx that will soon begin supplying MacBooks and organic eggs to New York’s well-heeled shoppers. The physical presence is a victory for the nation’s largest retailer, which has faced resistance from labor groups and their political allies every time it has proposed opening a store in the five boroughs.”
— Fire at Tesla is contained. Reuters: “A fire broke out at Tesla Inc.’s Gigafactory in Nevada’s Tahoe-Reno Industrial Center late on Saturday but was contained by early Sunday and production had resumed, emergency officials and the company said. The factory produces Model 3 electric motors and battery packs, according to the electric carmaker’s website. The company said there were no injuries in the fire. . . . A Tesla spokesperson said employees had been evacuated as a precautionary measure, but there were no injuries and production began again on Sunday morning.”
— Some super-rich GOP donors are fleeing. NYT's Bari Weiss: "Not two years ago, [Seth] Klarman, a registered independent, was the biggest donor to the Republican Party in New England. According to The Boston Globe, during the Obama administration, Mr. Klarman gave more than $7 million to the party… No longer. Among the many things [Trump] has upended, one has been Mr. Klarman’s political giving. The denunciation of the president and his party in papers like this one has done nothing to change their behavior. He hopes money will. The F.E.C. filings that will come out on Sept. 20 will show that Mr. Klarman is now giving almost exclusively Democrats — and donating far more money than he ever has."
Les Wexner, too. From the Columbus Dispatch: After former Democratic President Barack Obama made a quiet stop in Columbus on Thursday night, the wealthiest Republican supporter in the state told a small audience at a Downtown event that he is fed up and has quit the Republican Party. 'I just decided I’m no longer a Republican,' said L Brands CEO Leslie H. Wexner, speaking during a panel discussion... 'I won’t support this nonsense in the Republican Party.'"
- The Center for Strategic and International Studies hosts a conversation with six former U.S. trade representatives.
- Senate Banking Committee hearing on fintech tomorrow.
- The Heritage Foundation hosts an event on “free market fairness” on Thursday.
- The Tax Policy Center organizes a discussion on “costs and benefits of tax regulations” on Thursday.
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