Commenting on the disappointing outcome of Trump's second Kim summit, UBS' economist Paul Donovan writes that "the US president (like the rest of us) is subject to the economic problem – limited time, and lots of demand on that time. Time focused on Korea is time that cannot be spent tweeting about trade. The president may want a quick win on trade to offset the Korean situation. There are media reports of a mid-March summit with China and a "quick" trade deal."
Indeed, at 1:37am ET overnight, Bloomberg reported that U.S. officials are preparing a "final trade deal" that President Trump and Chinese counterpart Xi Jinping could sign in weeks. As Bloomberg further adds, "the U.S. is eyeing a summit between the two presidents as soon as mid-March" although the planning has been complicated by Xi’s need to lead China’s annual National People’s Congress in early March, as well as make other foreign trips.
Naturally, the report goes on to say that Trump will have the final call on the U.S. side, and references what he said in Vietnam when he showed he’s willing to walk away if he doesn’t like the terms on the table, including with China.
“Speaking of China we’re very well on our way to doing something special. But we’ll see,” Trump said at a press conference in Hanoi on Thursday. “I am always prepared to walk. I’m never afraid to walk from a deal, and I would do that with China, too, if it didn’t work out.”
The latest news of preparations for a Trump-Xi summit come amid conflicting signals from the Trump administration over the prospect of a deal. Treasury Secretary Steven Mnuchin said on Thursday the two nations are working on a 150-page document that would turn into a “very detailed agreement,” though he cautioned that “we still have more work to do.”
Boosting the optimistic case, on Thursday Trump's chief economic adviser Larry Kudlow said the countries are on the verge of an “historic” pact that would commit Beijing to cut subsidies on state-owned companies and disclose when its central bank intervenes in currency markets.
“The progress has been terrific,” Kudlow, director of the White House’s National Economic Council, said in an interview on CNBC. “We have to hear from President Xi and the Politburo of course, but I think we’re headed toward a remarkable historic deal.”
The comments by Kudlow, the trade "good cop", came just a day after Trump’s top trade negotiator struck a far more pessimistic tone: trade "bad cop" USTR Robert Lighthizer told lawmakers that more work needs to be done and said the administration won’t accept a deal that doesn’t include significant “structural” changes to China’s state-driven economy. He also stressed the need for a enforcement mechanism, allowing the U.S. to take unilateral action if China breaks the rules.
So is a trade deal with China imminent? Perhaps, although as skeptics have repeatedly pointed out, any such "deal" wouldn't be worth the paper it is printed on. One such skeptic is Rabobank's Michael Every who provides the following commentary on "what might have happened" in Vietnam to force Trump to come home empty-handed without even a hint of an agreement:
Perhaps Trump had no game plan other than to dangle the keys to Disneyland under Kim’s nose. Perhaps Kim saw Trump was under pressure domestically and thought he needed an easy win of a signing ceremony meaning nothing. Perhaps Trump is under pressure from looking weak on China so had to look tough here. Or perhaps it was the menu: marinated tender sirloin grilled served with kimchi fermented inside a pear may have been a bit OTT for DT. (Indeed, CNN’s Will Ripley —believe it or not— prophetically tweeted ahead of the walkout: “A source close to the planning of tonight's dinner in Hanoi with Donald Trump and Kim Jong Un says it has been a struggle to get the menu approved by the US and North Korea. If they had a hard time negotiating what's for dinner, what does that say about denuclearization talks?!”)
Yet just perhaps China wasn’t prepared to sign off on Kim making nice with the US. Consider that the editor of China’s snarky Global Times backs Kim’s “reasonable demand” to lift some sanctions first. So let’s presume China played a spoiler role: what do you think is going to happen with the US-China trade deal the markets are so certain is in the bag? Yes, Trump might still need a quick ‘win’: but he’s also just shown he will walk away from a bad deal even when there is a Nobel Prize on the line, and has won bipartisan support at home from doing so. Meanwhile, Bloomberg has a report on US-China trade suggesting it is the US that is taking the larger hit to its exports at USD40bn. That doesn’t say the US is “losing” a trade battle with China due to tariffs: it shows exports to China have plummeted because Beijing has boycotted US goods entirely. So what’s the real message? That China is not a market economy and if you want to win a trade war with it you have to walk away from it too. Yes, Bloomberg also reports Larry Kudlow says the US is on the cusp of a “remarkable, historic deal” where China will buy more, “significantly” cut subsidies to SOEs, and disclose PBOC intervention in the FX market. But let’s see how the reality matches the hype, especially over enforcement. For example, the US just won a WTO case against China over its price support for wheat, corn, and rice: are they really going to act on the back of it? Like they did with Mastercard and Visa?
So where does that leave Trump according to Every:
Wait for Kim to ring and hope he doesn’t start testing again? Or talk to the real boss further north – the one not buying US goods? Nothing is certain - but that still includes the comfortable assumption of the best outcome in the best of all possible worlds, which is what markets are still pricing for.
Whatever the outcome of the "imminent" trade deal with China, with the S&P set to open back over 2,800, it appears that all the best case outcomes are once again in the market.