Leaders in foreign capitals are likely updating their trade war strategies after watching how President Trump handled his confrontation with Mexico.
The episode provides a couple of important lessons for governments (think: China, the European Union and Japan) still facing their own showdowns with the Trump administration.
For one, Trump’s willingness to threaten a top trading partner with stiff tariffs — even as his administration pushes ratification of a trade pact with Mexico and Canada as its top legislative priority — sends a clear message about the president’s respect for his own trade deals. That is, even a signed agreement offers no protection against Trump deciding, with no warning, to launch new hostilities.
What’s more, the warmed-over offers from Mexico that Trump is touting as a major victory, along with an unverified claim about new farm purchases, suggest the president cares less about substance than his ability to declare a win. As the New York Times’s Michael Shear and Maggie Haberman detailed over the weekend, the deal “consists largely of actions that Mexico had already promised to take in prior discussions with the United States over the past several months, according to officials from both countries who are familiar with the negotiations.” And Bloomberg News found no support for Trump’s assertion, via tweet, that Mexico has agreed to “immediately begin buying large quantities of agricultural product from our great patriot farmers.”
Trump pushed back on the reporting Sunday, including by teasing “some things” the two countries agreed on but haven’t announced yet:
The Failing @nytimes story on Mexico and Illegal Immigration through our Southern Border has now been proven shockingly false and untrue, bad reporting, and the paper is embarrassed by it. The only problem is that they knew it was Fake News before it went out. Corrupt Media!— Donald J. Trump (@realDonaldTrump) June 9, 2019
.....Mexico was not being cooperative on the Border in things we had, or didn’t have, and now I have full confidence, especially after speaking to their President yesterday, that they will be very cooperative and want to get the job properly done. Importantly, some things.....— Donald J. Trump (@realDonaldTrump) June 9, 2019
.....there is not, we can always go back to our previous, very profitable, position of Tariffs - But I don’t believe that will be necessary. The Failing @nytimes, & ratings challenged @CNN, will do anything possible to see our Country fail! They are truly The Enemy of the People!— Donald J. Trump (@realDonaldTrump) June 9, 2019
Nevertheless, Trump’s bolt-from-the-blue tariff threat to curb the border crisis and his rapid climbdown — the entire episode lasted nine days — suggest that negotiators who find themselves across the table from Trump’s trade team would be smart to keep meaningful concessions to a minimum.
As the president just demonstrated, he is now willing to use tariffs as a cudgel to secure policy aims outside the trade arena. That means a country could make painful sacrifices to secure a trade pact only to be left staring down the barrel of a fresh tariff threat over a non-trade matter.
“No matter what the situation, you will be facing tariffs from the U.S., so you might as well not make any concessions,” Jorge Guajardo, a former Mexican ambassador to China now with McLarty Associates, told the Wall Street Journal (as the WSJ’s Nick Timiraos noted on Twitter.)
And Trump further undermined his leverage in future talks by accepting a quarter-loaf deal and celebrating it as a total vindication in the face of building domestic pushback from congressional Republicans, business leaders and some in his own administration.
It will surely be harder for him to earn true concessions if foreign counterparts believe that maximalist demands from Trump today could dissolve in the face of a wobble in U.S. economic performance, or if the stock market stumbles, or if pressures from Congressional investigations or the 2020 race increase pressure to secure a big win.
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— Futures climb after Mexico deal. WSJ's Avantika Chilkoti: "Global equity markets ticked up Monday as investors cheered an immigration deal between the U.S. and Mexico, struck late Friday, which lifted the threat of new tariffs. In Europe, the Stoxx Europe 600 was up 0.2% in morning trading, while German markets were closed for a public holiday. In Asia, the Shanghai Stock Exchange was up 0.9%, Hong Kong’s Hang Seng gained 2.2% and Japan’s Nikkei index was up 1.2%.
"Futures pointed to opening gains on Wall Street of 0.3% for both the Dow Jones Industrial Average and the S&P 500."
— Manufacturing drags. WSJ's Austen Hufford and Patrick McGroarty: "Factories have shifted into low gear after a year of record output and big job gains, putting additional pressure on a U.S. economy that already is expected to grow more slowly this year. American consumers and companies are buying fewer cars, trucks and tractors and building fewer houses. That, in turn, is weighing on demand for wheels and steel parts, washing machines and paint... That means manufacturers, which contributed more than any other industry to the U.S. economy’s 2.9% expansion last year, could become a drag on growth."
— Chinese imports fall as economy stumbles. Bloomberg: "China’s imports tumbled in May and a surprise rise in exports wasn’t enough to dispel concerns that the economic dispute with the U.S. will intensify and damage the global economy. Imports declined by 8.5% in May from a year earlier, according to the customs administration, more than double the forecast drop. While exports rose 1.1% compared to an expected decline, shipments to the U.S. fell for a second month. The fall in imports underscores the weakness of the domestic economy while the uptick in exports may well prove temporary."
— G-20 finance chiefs express concerns over trade: “Group of 20 finance leaders on Sunday said that trade and geopolitical tensions have ‘intensified’, raising risks to improving global growth, but they stopped short of calling for a resolution of a deepening U.S.-China trade conflict,” Reuters’s Francesco Canepa and Jan Strupczewski report. “After fiery negotiations that nearly aborted the issuance of a communique, finance ministers and central bank governors meeting in southern Japan repeated tepid support for a rules-based multilateral trading system.”
“However, the final language excluded a proposed clause to ‘recognize the pressing need to resolve trade tensions’, which was dropped from a previous draft debated on Saturday. The deletion, which G20 sources said came at the insistence of the United States, shows a desire by Washington to avoid encumbrances as it increases tariffs on Chinese goods. The statement also contains no admissions that the deepening U.S.-China trade conflict is hurting global growth.”
— New bipartisan bills threaten Chinese IPOs: “American stock exchanges have emerged as the latest battleground in the ongoing political fight between the U.S. and China. While bilateral discussions on trade have made little headway in recent weeks, Republican and Democratic lawmakers on Capitol Hill have aggressively moved forward with legislation that increases oversight for more than $1 trillion worth of U.S.-listed Chinese companies, putting stocks like Alibaba in the spotlight and future listings on these exchanges in question,” Yahoo Finance’s Akiko Fujita and Krystal Hu report.
“Two bipartisan bills have been introduced over the last few months, aimed at going after Chinese companies that don’t comply with auditing rules in the U.S. [Sen. Chris Van Hollen’s bill (D-Md.),] which was co-sponsored by Sen. John Kennedy (R-LA) and introduced in March, gives listed Chinese firms three years to come in compliance with oversight requirements of the PCAOB, a non-profit corporation Congress created in 2002, in an effort to restore reporting credibility.”
— Acting budget chief seeks to delay Huawei ban: “The White House’s acting budget chief is pushing for a delay in implementing key provisions of a law that restricts U.S. government’s business with Huawei Technologies Co., citing the burdens on U.S. companies that use its technology,” the Wall Street Journal’s Dan Strumpf reports. “The request was made in a letter by Russell T. Vought, the acting director of the Office of Management and Budget, to Vice President Mike Pence and nine members of Congress, a copy of which was reviewed by The Wall Street Journal.”
“The request from Mr. Vought, dated June 4, asks for a delay in the implementation of portions of the National Defense Authorization Act. Signed by [Trump] last year, the defense policy law contains several provisions targeting Huawei and other Chinese tech companies. They include a ban on U.S. agencies, and on recipients of federal grants and loans, from doing business with the Chinese companies or with contractors that make substantial use of the companies’ products.”
— China warns tech companies about complying with U.S. trade restrictions. “Chinese authorities summoned some of the world’s largest tech companies this week to tell them they could face repercussions if they respond too aggressively to U.S. trade restrictions, according to people familiar with the matter,” the Wall Street Journal’s Asa Fitch and Yoko Kubota report.
“Among the companies called in were chip makers Intel Corp., Qualcomm Inc., ARM Holdings PLC and SK Hynix Inc., software giant Microsoft Corp., South Korea’s Samsung Electronics Co., computer maker Dell Technologies Inc., Finnish electronics company Nokia Corp. and networking equipment maker Cisco Systems Inc., according to one of the people.”
— Raytheon and United Technologies are in late-stage merger talks. “Raytheon is in late-stage talks to combine with United Technologies’ aerospace unit in an all-stock deal to create a new company worth more than $100 billion, a tie-up that would consolidate the aviation and defense sectors, according to a source familiar with the matter,” CNBC’s Leslie Josephs reports.
“The deal, which could be announced as early as Monday morning, would combine United Technologies’ aerospace business with Raytheon and bring the two suppliers to giants like Airbus, Boeing and Lockheed Martin under one roof.”
— Why the South’s economy is falling behind: “The American South spent much of the past century trying to overcome its position as the country’s poorest and least-developed region, with considerable success: By the 2009 recession it had nearly caught up economically with its northern and western neighbors,” the Wall Street Journal’s Sharon Nunn reports. “That trend has now reversed. Since 2009, the South’s convergence has turned to divergence, as the region recorded the country’s slowest growth in output and wages, the lowest labor-force participation rate and the highest unemployment rate.”
“Behind the reversal: The policies that drove the region’s catch-up — relatively low taxes and low wages that attracted factories and blue-collar jobs — have proven inadequate in an expanding economy where the forces of globalization favor cities with concentrations of capital and educated workers.”
— Lawmakers scrutinize TransDigm: “Members of the House Oversight Committee are calling for an investigation into thousands of government contracts the Defense Department awarded to TransDigm, a holding company that owns dozens of niche military aircraft parts suppliers, after lawmakers accused the company of exploiting regulatory loopholes to boost profits,” my colleague Aaron Gregg reports.
“In a report released mid-February, the Defense Department inspector general concluded that TransDigm, based in Ohio, had earned “excessive profits” on 46 of the 47 spare parts audited, with profit margins for specific parts ranging from 17 percent to well above 4,000 percent. The products themselves were redacted in the IG’s report, making it hard to determine whether the company is providing advanced technical hardware or simpler parts such as door handles.”
— Republicans push faster bank deregulation. WSJ's Andrew Ackerman and Gabriel Rubin: "Trump-appointed regulators came into office saying they would pare back Wall Street’s postcrisis rulebook. More than two years into the administration’s tenure, most of the work remains unfinished, particularly for the biggest banks. That worries financial firms and some Republican lawmakers, who fear the window for a regulatory rollback could be narrow, especially if Democrats notch pivotal electoral victories in 2020.
"'I’m not satisfied with the outcome,' said Sen. Jerry Moran (R., Kan.). He and a group of other Republican senators are urging regulators to move more quickly. The goal: lock in as many changes as possible by year’s end."
— Mnuchin: No quick payday for Fannie, Freddie investors. Bloomberg's Saleha Mohsin and Austin Weinstein: "Treasury Secretary Steven Mnuchin made clear that freeing Fannie Mae and Freddie Mac from U.S. control won’t happen without a major overhaul of the nation’s housing finance system, potentially dashing investors’ hopes that they might soon make a windfall from their stakes in the mortgage giants. In a June 8 interview, Mnuchin was adamant that the Trump administration won’t just let Fannie and Freddie build up their capital buffers and then release the companies. He also said he backed a key reform that can only be implemented by Congress, casting doubt on how ambitious the administration will be absent a legislative fix."
- The House Financial Services Subcommittee on Oversight and Investigations holds a hearing on the student loan servicing market on Tuesday.
- The Cato Institute holds a summit on financial regulation, which will include FDIC chairman Jelena McWilliams, on Wednesday.
- The Brookings Institution holds an event on Hong Kong and trade on Wednesday.
- The Peterson Institute for International Economics holds an event featuring National Economic Council Director Larry Kudlow on Thursday.
- The National Economists Club holds an event with the National Association for Manufacturers Chad Moutray on Thursday.
Total misstep or brilliant strategy? Politicians weigh in on Trump's tariff threat: