Trump: "We Are Right Where We Want To Be With China"

The Trump trade war twitter barrage continued late on Sunday, and shortly before the reopening of futures (which slumped over 1% at the 6pm EDT open), the President weighed in on the state of latest state of trade negotiations with China, saying the U.S. was "right where we want to be", poised to collect "tens of billions of dollars" in tariffs from China, even though Trump's own chief economic advisor Larry Kudlow earlier rejected Trump's narrative, saying that US companies and consumer would end up paying the tariffs, agreeing with Chris Wallace who said that "It’s not China that pays tariffs. It’s the American importers, the American companies that pay what in effect is a tax increase and oftentimes passes it on to U.S. consumers."

Trump also echoed a plan he proposed first on Friday to redirect money generated by tariffs to buy up American agricultural products and “distribute the food to starving people” around the world, even though that suggestion too has been promptly criticized.

As we reported earlier (see bwlo) Kudlow said that “both sides will suffer” from the widening U.S.-China trade war, while predicting that the impact on U.S. jobs and growth from higher tariffs assessed on Chinese goods would be small.

Trump's lack of eagerness to de-escalate the trade feud will result in a heightened risk-off mood, as it comes shortly after the flagship newspaper of the communist party, the People’s Daily, said the U.S. should take full responsibility for trade-talk setbacks because it raised tariffs on China’s products, state television reported according to Bloomberg.

Issuing a mirror image of Washington's own narrative, China's CCTV state broadcaster said that China sought a mutually beneficial agreement but the U.S. went back on its word, citing a commentary that will be published on Monday, according to which even though the mainland has always attached great importance to the talks but has been pushed to its limits.

Separately, the state-owned Global Times tabloid, the nationalist English-language sister publication of the People’s Daily, posted a similar editorial late Sunday local time which described "the fierce U.S. offensive" against China as “irrational” and hurtful to the U.S. economy. In the article, the author claimed that China "is willing to reach a deal" on trade but will never make concessions on issues of principle, nor trade its core interests."

And so the US now waits to see just how China will respond.

During the Sunday morning TV, White House economic advisor Larry Kudlow said that the Trump administration is expecting retaliation from China, but stressed that negotiations are ongoing during a several week grace period before Chinese goods that were shipped to the US after midnight on Friday are eventually taxed at the new tariff rate.

“The problem is two weeks ago in China there was backtracking by the Chinese," Kudlow said on "Fox News Sunday", throwing the ball of responsibility back in China's court. "The expected countermeasures have not yet materialized. We may know more today or even this evening or tomorrow,” Larry Kudlow said on Fox.

Seeking to modestly defuse tensions, Kudlow added the potential additional tariffs may take months to implement: “Call it a couple of months. Call it three months. I don’t know. That will take some time and then of course the president’s going to have to make the final decision on that."

Addressing a growing fear that the escalating trade war will hit US consumers with even higher prices, Kudlow predicted that the impact on U.S. jobs and growth from higher tariffs assessed on Chinese goods would be “de minimis,” while conceding that “both sides” will suffer from the trade war. On the other hand, considering that tens of billions in Chinese imports may soon be hit with tariffs, China

In his first interview since high-level talks between Chinese and American officials broke up Friday without a deal, Kudlow told “Fox News Sunday” that China has invited U.S. Trade Representative Robert Lighthizer and Treasury Secretary Steven Mnuchin back to Beijing.

Kudlow also added that Trump and Chinese President Xi Jinping are likely to meet during the G20 meeting in Osaka, Japan, in late June, and that negotiations are ongoing.

“The talks will continue, and I will say this, there’s a G20 meeting in Japan toward the end of June, the chances President Trump and President Xi will get together at that meeting are probably pretty good,” he said, adding that China has invited U.S. Trade Representative Robert Lighthizer and Treasury Secretary Steven Mnuchin back to Beijing, although no date has been set so far for fresh talks.

It is also notable that Kudlow brike with the official Trump narrative, admitting that the Chinese do not directly pay tariffs on goods coming into the U.S., as Trump has repeatedly claimed.

"It’s not China that pays tariffs. It’s the American importers, the American companies that pay what in effect is a tax increase and oftentimes passes it on to U.S. consumers," Wallace said.

As we noted earlier , on Saturday, President Donald Trump said in tweets that it would be wise for China to “act now” to finish a trade deal with the U.S., warning that “far worse” terms would be offered after what he predicted would be his certain re-election in 2020.

* * *

And so, as attention turns to China's "countermeasures", Bloomberg notes that while the Communist Party hasn’t yet announced what steps it would take, "the commentaries are probably the first part of its response, since state media in China is tightly controlled and the government dictates what can be covered."

“If they weren’t being seriously provoked, the Chinese people would not favor any trade war. However, once the country is strategically coerced, nothing is unbearable for China in order to safeguard its sovereignty and dignity,” the Global Times said in the editorial. If the U.S. is to play a roller-coaster-style thriller game, it will bear the consequences.”

In an earlier editorial, the Global Times said the U.S. has made a fundamental misjudgment, that is, believing China is unilaterally benefiting from China-U.S. economic and trade relations.”

"The U.S. has misunderstood the interests of both sides, and seriously underestimated China’s endurance," the Global Times warned.

So to summarize the current state of the talks that on Friday were described as "constructive" helping send the Dow soaring by over 500 points intraday, here is a quick recap courtesy of Mish Shedlock:

  1. Trump demands China put commitments into law.
  2. China replied that "no one should expect China to swallow bitter fruit that harms its core interests".
  3. Trump ordered Lighthizer to begin the process of imposing tariffs on all remaining imports from China This would impact an additional $300 billion worth of goods.
  4. China said it would retaliate.
  5. On Saturday, Trump warned China not to retaliate or it would face worse terms. Trump Tweeted "Love collecting BIG TARIFFS!"
  6. Kudlow said on Sunday he expected retaliatory tariffs to kick in but that it had not happened yet.
  7. China warned Trump on Sunday not to underestimate China's endurance and that China is not afraid to fight.
  8. China posted its own set of demands for further talks including the removal of all extra tariffs.

As Mish concludes, "This dialog is what's known as "constructive". It's so constructive that further talks between Trump and have been pushed back until the end of June, subject to change of course."

Meanwhile, as the market's hope for quick resolution fades, keep an eye on Apple and other Chinese consumer-reliant companies, for the market's snap reaction - if Beijing plans to engage in "soft retaliation", it is those corporations that derive much of their revenue from China that will be hit first and hardest. And if there is indeed a shift in sentiment, it will first appear in US equity futures and Chinese stocks, both of which open for trading in just a few hours.