Trump's Inner Circle Pushed Him To Cave To China And Cut Trade Deal

Shortly after leaving CNBC and joining the Trump Administration - taking a job as Trump's top economic advisor, which had recently been vacated by former Goldman President Gary Cohn - the fintwit brain trust spent a few days obsessing about how Kudlow would reconcile himself with Trump's protectionist bent.

In the end, it was pretty straightforward. As Kudlow transitioned into the role of parroting the administration's economic message on cable news shows, he told his interviewers about the concept of "fair trade". Kudlow explained that while he's a believer in free trade, the Chinese have been taking advantage of the US for decades, and that he supports President Trump's efforts to put a stop to it. With that, Kudlow became the White House's preeminent "fair trade" warrior.

But as it turns out, Kudlow hasn't entirely forsaken the Chamber of Commerce-led American pro-business establishment. And as WSJ reported Friday morning, Kudlow last week organized a meeting in the Oval Office with "outside experts" on trade who reportedly warned Trump that further escalation of the US-China trade war might threaten the stability of the American economy, and hurt Trump's election chances.

It's the first sign yet that even Trump's top economic advisors are pushing him to cave to Beijing and strike a deal on trade that would, in all likelihood, involve raising most, if not all, of the tariffs that Washington has imposed on Chinese goods.

Kudlow was back on CNBC Friday morning to discuss the talks with China, USMCA and the rest of the administration's economic agenda, complete with an "economic boom" in 2020.

But during this Oct. 8 briefing in the White House, which involved Stephen Moore, the one-time Fed-board candidate, as well as economist Lawrence Lindsey, Kudlow was back to championing the free-trade policies that he had espoused before joining the administration.

"There was a general consensus that the economy was really strong, the best economy we’ve had in 30 years, and that what’s going to get him re-elected is the economy," said Moore, who advised Trump during his 2016 campaign.

But "we all agreed that the uncertainty about the trade situation with China is a negative," Moore said.

At one point during the meeting, Trump summoned Peter Navarro, the China hawk and trade advisor who has been working in the West Wing since the dawn of the Trump administration.

"Where's Peter? Get Navarro in here," Trump said.

Since agreeing with Vice Premier Liu He last Friday on a 'handshake' deal for "Phase One" of a US-China trade pact, reports this week have suggested that the two sides aren't so solid. 

It's unclear what kind of impact the Kudlow meeting had on Trump's thinking. Trump has agreed to put off a planned tariff hike set for this month, but the next hike, set for December, is still on, as of Friday morning. However, the two negotiating teams are expected to meet again during an upcoming summit in Chile.

According to WSJ, Moore has also advised Trump to pursue a trade "detente" with China. A deal would "remove that obstacle to growth right now, you'll see a nice rebound in 2020, and be in a very strong position to get re-elected," Moore reportedly said.

A White House advisor asked to comment on the meeting said President Trump hears from many advisors espousing a range of view points before making a decision.

In recent months, Trump has heard from several donors who are pushing for him to make a deal, including Republican megadonor Sheldon Adelson. Even Mitch McConnell complained about the impact of the trade war on American farmers.

Trump is "under immense pressure from Wall Street and those members of the Senate that are aligned with the big donors to get rid of tariffs," said Stephen Bannon, former White House chief strategist and an ally of Mr. Navarro on China. "If they have to roll out ‘free market’ economists that have served as Wall Street’s biggest cheerleaders to go down to the Oval and try to convince him to do it, they will."

So far, US growth has remained robust, but there have been some worrying signs in the economic data, including a drop in an index of manufacturing production - the first such drop since Trump's election - and a drop in job openings to a 17-month low. Many worry these are early signs of an economy poised for a downturn.

With the Fed poised to hike rates again this month, a genuine trade truce with China and a Brexit deal in the UK could be enough to lift the global economy out of the doldrums. From where Kudlow sits, even if Washington ultimately caves to Beijing, that would ultimately be worth it for the boost to Trump's electoral prospects.