Investors are already cheering a cease-fire in the U.S-China trade war. But the agreement President Trump and Chinese President Xi Jinping announced over the weekend in Buenos Aires offers less than meets the eye.
The basic terms:
- In return for shelving a major escalation in tariffs on $200 billion in Chinese goods set to bite on Jan. 1, the Chinese will buy an as-yet unspecified amount of American farm, energy and industrial goods;
- the Chinese also pledged to crack down on fentanyl, a synthetic opioid fueling an epidemic of American overdoses;
- and the Trump administration set a 90-day timer for the two sides to reach a breakthrough on a long and knotty list of U.S. complaints about Chinese economic policy.
And Trump on Sunday night said in a tweet the Chinese have also agreed to reduce tariffs on American-made cars:
China has agreed to reduce and remove tariffs on cars coming into China from the U.S. Currently the tariff is 40%.— Donald J. Trump (@realDonaldTrump) December 3, 2018
Chinese officials have yet to confirm the president's assertion — a Chinese Foreign Ministry spokesman declined to comment on it today. And Beijing cut tariffs on other auto imports over the summer to 15 percent as it was hiking them on American cars to 40 percent as retaliation for Trump's tariffs, as my colleague Heather Long points out:
This isn’t as big of a win as it seems. China’s current tariff is 40% b/c of Trump.— Heather Long (@byHeatherLong) December 3, 2018
China had a 25% tariff on foreign cars, which it reduced to 15% this spring. But after Trump hit China with tariffs, Xi bumped US car tariff to 40%
The real q = Is China going lower than 15%?? https://t.co/ONVkkp27dC
Stock market futures surged on the news of the broader cease-fire. Per CNBC: “Futures on the Dow Jones Industrial Average indicated an open of about 475 points as of 5.50 a.m. ET Monday. Meanwhile, S&P 500 futures had an implied positive open of 52.5 points, while futures on the Nasdaq-100, home of many technology companies that sell to China, was seen more than 180 points higher.”
The early returns confirmed the assessment of Evercore ISI’s Terry Haines, who writes in a note this morning that the agreement "continues to be a very likely strong short-term market positive," though "the dinner result is only a temporary pause in trade war escalation, and market enthusiasm this week should and likely will be tempered accordingly."
Trump dramatically oversold the development by declaring it “an incredible deal” to reporters on the return flight home. “It goes down, certainly, if it happens, it goes down as one of the largest deals ever made,” the president said.
As limited as the agreement was, the two sides presented meaningfully different rundowns of what it involved. Bloomberg captured the divergence by translating the statement released by the Chinese and then comparing it side-by-side with the U.S. version. In contrast to the U.S. statement, for example, the Chinese one makes no mention of a 90-day deadline, of buying a “very substantial” amount of U.S. goods, or of agreeing to reconsider approval of the Qualcomm-NXP merger. (Qualcomm says the deal will stay dead.)
“In a sign of the difficulty of the talks ahead, Chinese officials haven’t acknowledged they accept the U.S. negotiating agenda or any deadline for talks,” The Wall Street Journal’s Bob Davis writes. “Nor is it clear what accommodation on any or all of the issues would prove sufficient to hold off the U.S. from raising tariffs when its deadline expires.”
From the Trump team, Davis reports, it’s not even clear who will be leading the talks: U.S. Trade Representative Robert E. Lighthizer has handled similar negotiations with the European Union and Japan, but Treasury under secretary David Malpass has been managing dealings with the Chinese and could continue.
Lighthizer previously has pointed to Beijing’s track record of promising to reform its practices, delaying, and then failing to follow through. Skeptics suggested there’s little reason to believe this time will be any different.
From Christopher Balding, an associate professor of business and economics at the HSBC Business School in Shenzhen:
Cannot be emphasized enough: this is not a deal and it is not a resolution. This is an agreement to delay further escalation. Neither side really gave anything except some cotton candy sweeteners. Nothing fundamental. Maybe be happy escalation had been delayed— Interpol CEO Balding (@BaldingsWorld) December 2, 2018
From economist Chad Bown, a senior fellow at the Peterson Institute of International Economics:
This is A LOT to get negotiated and pinned down into an enforceable deal in 90 days.— Chad P. Bown (@ChadBown) December 2, 2018
But they are talking. https://t.co/j5DInYVspJ
From Patrick Chonavec, chief strategist at Silvercrest Asset Management:
1) Suspension of new tariffs is a Trump give, because only new Chinese tariffs on the table were retaliatory.— Patrick Chovanec (@prchovanec) December 2, 2018
2) Expect helpful bounce (economically & politically) in US farm prices.
3) Fentanyl is easily promised, but delivery will take rigorous follow up. https://t.co/JF32geLR4X
But the message investors may take from the weekend is that what had looked like a one-way ratchet toward greater pain suddenly found a release valve. Reaching a long-term agreement that satisfies U.S. demands in the next three months is a “near-impossible task, but we expect the deadline to be extended again in due course,” Pantheon Macroeconomics wrote in a Sunday note. “The lesson of Saturday night is that both sides want to avoid catastrophe, but neither is hurting badly enough — yet — to make substantial immediate concessions."
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— Reviving the bull case. Bloomberg's Chris Anstey and co.: "Bulls hoping for a late-cycle rally in risk assets are looking a lot happier this Monday than last. The narrative that it’s just too early for investors to position for the end of one of the longest expansions on record has been given a fillip from the cease-fire in the U.S.-China trade war, prospect for a pause in the Federal Reserve’s interest-rate hiking cycle and moves to address a glut in oil supplies... Time is running out, but a continued tilt toward risk could yet avert what by one measure was set to be the worst year for markets on record. In early November, Deutsche Bank AG strategists had calculated that 89 percent of assets had handed investors losses in U.S. dollar terms -- more than any previous year going back over a century."
But trade tensions still weigh globally. Reuters: "Global economic prospects appear gloomy as year-end approaches after factory activity and export orders weakened in November, prompting analysts to predict no quick rebound amid persistent global trade tensions. In a sign that corporate sentiment is taking a hit from the worries over protectionism, manufacturing activity slipped in November in countries as varied as France, Germany, Indonesia and South Korea, IHS Markit Purchasing Managers’ Indexes showed on Monday."
— Qatar says it will leave OPEC. WSJ's Benoit Faucon and Adam Clark: “Qatar said it plans to leave the Organization of the Petroleum Exporting Countries, a surprise decision for a member that has long played a key role inside the cartel, but has more recently clashed with de facto leader Saudi Arabia. Qatar is a small oil producer, but has in recent decades become a natural gas giant. Monday, ahead of a planned meeting of OPEC later this week, it said it was leaving the group to concentrate on boosting its gas production. ... Qatar Energy Minister Saad al-Kaabi said the country would withdraw from the organization by January 2019 at a press conference Monday, state-run company Qatar Petroleum said on its Twitter account.”
— May faces new Brexit test. Bloomberg's David Goodman: “U.K. Prime Minister Theresa May faces yet another grueling battle this week as members of Parliament sink their teeth into her Brexit deal ahead of a crucial vote. On Monday, politicians on all sides will ratchet up the pressure on May to justify the terms she’s agreed to with the European Union by demanding she publish the government’s internal legal advice underpinning the accord.
“Meanwhile, the opposition Labour Party further raised the stakes for next week’s key parliamentary vote on May’s deal, signaling it will propose a motion to bring down her government if, as is widely expected, the prime minister’s plan is rejected.”
— Trump's NAFTA threat meets skepticism. The Washington Post's Paige Winfield Cunningham: “Lawmakers in both parties appear wary of [Trump’s] threat to pull the United States from the North American Free Trade Agreement, an apparent move to pressure a reluctant Congress to approve his replacement to the long-standing trade pact. ‘I think we should see if we can get it passed first,’ Sen. John Barrasso (R-Wyo.) said on NBC News’s ‘Meet the Press.’ ‘I want to see how many Democratic votes come on board for this.’
"Sen. Sherrod Brown (D-Ohio) said he will not support the new trade deal as it stands because it ‘doesn’t live up’ to the president’s promises to help workers and halt outsourcing. ... Brown, who has long opposed NAFTA, said he wants to return to negotiations with Canadian and Mexican leaders on the replacement agreement."
Future of metals tariffs remains murky. Bloomberg: "Fresh off signing their trade deal with the U.S., the governments of Canada and Mexico are diverging on the continent’s other trade fight over metals tariffs -- with Mexico setting hopes for a deal sooner than Canada... Jesus Seade, the Nafta negotiator for Mexico’s new president, has said he hopes for a deal by the end of the year, but Canada isn’t setting any timelines. Instead, it’s holding out for a victory in legal challenges against the tariffs and signaling there may be no quick fix."
— Grassley wants to leash Trump on trade. Axios's Caitlin Owens: "Incoming Senate Finance Chairman Chuck Grassley (R-Iowa) told Axios he may try to make it harder for the president to impose new tariffs... Grassley said he would take a favorable view of legislation limiting the administration's power to impose tariffs to protect national security (known as Section 232 authority). 'Maybe the definition of national security or maybe the conditions under which national security could be used as an excuse is a little wide.' ... While the administration has eased some Republican members' concerns by reaching an updated trade deal with Mexico and China, many farm-state members say they still worry about how the rest of Trump's trade disputes will play out. 'The interest in solving this problem is increasing,' said Sen. Jerry Moran (R-Kan.)."
But Blunt is encouraged. The Hill's Megan Keller: “Sen. Roy Blunt (R-Mo.) said Sunday that skeptics of [Trump's] trade policies should be encouraged by recent developments. ‘People like me who’ve really been concerned about the president’s stated trade policy can take some encouragement about what happened in the last couple days,’ Blunt told ‘Fox News Sunday.’ ‘The signing of the U.S.-Canada-Mexico trade agreement, that's a big step that six months ago or even just a few weeks ago we were concerned we would not be making that kind of progress.’”
— Cardin, Brown criticize GM layoffs and cuts. Bloomberg News's Katia Dmitrieva: “Trump’s trade war and corporate greed contributed to General Motors Co. cutting jobs and closing plants, Democratic senators in states affected by the decisions said ahead of an expected meeting this week with lawmakers and Chief Executive Officer Mary Barra. ... Senator Ben Cardin of Maryland said the president’s duties contributed to GM’s announcement last week that it would cancel production at four U.S. plants and cut thousands of jobs amid weak demand for the vehicles or other products made at those sites in Ohio, Michigan and Maryland. ... Senator Sherrod Brown of Ohio, a key swing state that buoyed [Trump’s] election victory in 2016, put the blame more on the company’s actions.”
- “Cohen’s guilty plea suggests Russia has ‘leverage’ over Trump, top Democrat says.” The Washington Post's Felicia Sonmez and Paige Winfield Cunningham.
- “Comey gives up lawsuit challenging House subpoena, will testify.” The Post's Spencer S. Hsu and Felicia Sonmez.
- “‘I had no contact with Assange,’ Roger Stone says.” The Post's Felicia Sonmez.
“Supreme Court to consider case that could affect potential Manafort prosecutions.” The Post’s Robert Barnes.
— Canada's cannabis industry is hiring. Bloomberg News's Kristine Owram: There's "swelling demand for labor in Canada’s five-year-old cannabis sector, where openings have tripled in the past year to 34 out of every 10,000 job postings, according to employment search engine Indeed.com... Between them, eight of Canada’s largest cannabis companies are now actively recruiting for approximately 1,700 positions, according to data compiled by Bloomberg. Many companies say they expect that number to grow as they expand production facilities after Canada legalized recreational marijuana in October. There’s been a spike in postings for jobs at cannabis growers and retailers. And next year will see even more demand for labor as Canada expands the number of legal cannabis products to include edibles and concentrates, said Alison McMahon, founder and CEO of Cannabis At Work, a recruitment and training site.”
Meanwhile, a fix for U.S. banks with customers in the legal marijuana business stands as the lone banking bill that could pass next year, the American Banker reports: "While success is certainly not guaranteed, a narrow safe harbor for financial institutions in states where cannabis is now permitted is beginning to draw wide support from industry officials as well as from lawmakers on both sides of the aisle."
— Goldman considers monitoring employees. FT's Laura Noonan: Goldman Sachs is considering a special surveillance programme to monitor higher risk employees in far-flung locations so the bank can demonstrate that ‘lessons have been learned’ from the 1MDB scandal. Goldman’s shares have fallen about 15 per cent in the month since the Department of Justice revealed indictments against two former Goldman bankers for their alleged role in the multibillion-dollar bribery and embezzlement scandal…
“Lawyers and compliance officers at Goldman have spent years trawling through emails and other records of the entire 1MDB deal team, according to a person familiar with the internal probe and the plans for changes.The person said that Goldman had not found any evidence of any wrongdoing beyond that alleged of Tim Leissner and Roger Ng, the two men indicted by the DoJ.”
— Amazon.com tests cashierless system for larger stores. WSJ's Heather Haddon and Laura Stevens: “Amazon.com Inc. is testing its cashierless checkout technology for bigger stores ... If successful, the strategy would further challenge brick-and-mortar retailers racing to make their businesses more convenient. The online retail giant is experimenting with the technology in Seattle in a larger space formatted like a big store ... The systems track what shoppers pick from shelves and charges them automatically when they leave a store... It is unclear whether Amazon intends to use the technology for Whole Foods, although that is the most likely application if executives can make it work.” (Amazon.com founder and chief executive Jeffrey P. Bezos owns The Washington Post.)
— Lawmakers discuss postponing shutdown deadline. NYT's Emily Cochrane: "Lawmakers were discussing on Sunday a short-term spending bill that would avert the possibility of a partial government shutdown as Washington mourns former President George Bush, according to people familiar with the talks. Staring down a Friday deadline with major conflicts left to resolve, lawmakers had expected to be engaged in fierce bargaining this week over a longer-term spending package that [Trump] has said must include funding for a border wall.
"But as the nation’s attention turns toward the former president, who died on Friday and is set to lie in state in the Capitol Rotunda through Wednesday morning, a bill that delays the deadline for one or two weeks would allow them to set aside negotiations and pay respects to Mr. Bush.
— NeverTrumpers on the Hill make a last stand. The Post's Sean Sullivan: "Some of [Trump’s] loudest Republican critics are asserting themselves during their final weeks in Congress, as the GOP prepares to usher in a class of lawmakers poised to show stronger support for the White House. One defiant Republican is seeking to protect the special counsel investigation into Russia’s interference in the 2016 election, another wants to toughen U.S. policy toward Saudi Arabia, and a third is warning that embracing Trump is perilous for the future of the Republican Party.
"The moves amount to a last gasp from a wing of the GOP that has been unable steer the party away from Trump during the first two years of his presidency and will see its ranks diminished in the next Congress."
- Federal Reserve Chair Jerome H. Powell appears before the Joint Economic Committee on Wednesday.
- Senate Banking Committee hearing on “oversight of pilot programs at Fannie Mae and Freddie Mac” on Wednesday.
- The Heritage Foundation hosts a conversation with House Financial Services Committee Chairman Jeb Hensarling (R-Tex.) on Wednesday in Washington.
- The Hamilton Project at the Brookings Institution hosts an event on “policy options to promote employment” on Thursday in Washington.
- Senate Banking Committee hearing on “oversight of the U.S. Securities and Exchange Commission” on Dec. 11.
— From the New Yorker's Roz Chast:
Unrest in Paris as thousands of “yellow vests” flock to protest:
AMLO promises radical change as he's sworn in as Mexico's new president:
New House members draw lottery numbers to pick offices: