Hot and heavy breathing behind the scenes, leaked to calm the markets.
Negotiations – led on the US side by Treasury Secretary Steven Mnuchin and US Trade Representative Robert Lighthizer, and on the Chinese side by Liu He, a newly anointed vice premier and President Xi Jinping’s top economic adviser – about how to address the gigantic China-US trade imbalance have quietly begun, the infamous “people with knowledge of the matter” told the Wall Street Journal.
On Saturday, Mnuchin called Liu, which was confirmed by the Treasury Department. A spokesman said that they “also discussed the trade deficit between our two countries and committed to continuing the dialogue to find a mutually agreeable way to reduce it.” Now Mnuchin is considering a trip to Beijing to pursue the negotiations, one of these people told the Wall Street Journal.
And last week, according to these people, Mnuchin and Lighthizer sent Liu a to-do list on trade with specific items the White House wants China to undertake, including:
- A reduction of the 25% tariffs that China imposes on US-made cars
- Increased purchases by China of US-made semiconductors. China would need to shift these purchases from Japanese and South Korean manufacturers, which aren’t going to be happy
- Reduce subsidies to state-owned enterprises
- Provide more regulatory transparency
- Ease restrictions on US companies in China, particularly requirements that they operate as joint ventures in which the US company’s ownership may be limited to 51%
- Giving US financial firms greater access to the Chinese market.
Clearly, in leaking these negotiations and the existence of this to-do list to the financial press, the White House is hoping to calm the markets, because the last thing it wants is to preside over a stock market plunge, though the stock market has all the best reasons to swoon, and the US-China trade situation isn’t needed to accomplish that.
President Trump himself had more than hinted at these negotiations last Thursday during his announcement of tariffs on up to $60 billion in imports and various other restrictions. But by now, it’s hard to distinguish, apparently, what to take seriously and what to let bounce off, and people were sidetracked by the gravity of the rest of what he’d said in the same paragraph:
“So we’ve spoken to China and we’re in the midst of a very large negotiation. We’ll see where it takes us. But in the meantime, we are sending a Section 301 action. I’ll be signing it right here, right now. I’d like to ask Bob Lighthizer to say a few words about the 301 and where we are in that negotiation.”
This Section 301 of the US Trade Act of 1974 hasn’t been used since 1995, when the WTO began sorting out trade disputes. But the US Trade Representative announced in August last year that it had “formally initiated” an investigation of China under Section 301, which “will seek to determine whether acts, policies, and practices of the Government of China related to technology transfer, intellectual property, and innovation are unreasonable or discriminatory and burden or restrict U.S. commerce.”
“The word that I want to use is ‘reciprocal,’” Trump added on Thursday. He used the example of China imposing 25% tariffs on US-made cars, while the US imposes only a 2.5% tariff on foreign-made cars – though he didn’t mention that pickups are protected in the US by 25% tariffs, and that’s why automakers that make them in the US have such obscene profit margins on pickups.
Mnuchin chimed in on Fox News Sunday. “We’re working on a pathway to see if we can reach an agreement as to what fair trade is for them,” Any deal, he said, would include China opening its markets further to US goods, lowering its tariffs, and ending its practice of pressuring US companies that want to do business in China to transfer their technology to the required Chinese joint-venture partners.
During the talks, according to these people with knowledge of the matter, Liu said he was grateful to hear specifics but he didn’t make any commitments. Whatever will come of this, one thing is for sure, Trump rattled some nerves and got China’s attention.
As one of the retaliatory measures, China issued a vague threat that it might cut back on purchases of US Treasuries. Read… China’s Empty Threat of Dumping its US Treasuries
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China used to be a developing country so it was granted loopholes to assist it compete in world trade. It’s probably time to wind them back.
US corporations have made China a fortune. In their desire to shaft unions and anything that added to production costs outsourcing overseas sounded good to them. Well now the downsides are showing up. The loss of union power and all sorts of cuts to benefits has ramped up unemployment – nothing like the official 6%, more like 19%- and low wages has sent aggregate demand tumbling. Sales are off and corporations are seeing their chickens coming home to roost.
Who to blame? not the corporate world, let it be China obviously. Trump is just the simpleton the corporations want. In any event the USA will not lose. Already China, and Japan’s, export surplus sits in reserve accounts in the US Fed. Some are used to buy treasuries, the rest for sale. They cannot buy gold!
Why does the US not lose? Because the US has benefited from having lots of cheap real goods at the cost of numbers in fed reserve accounts, like pieces of paper. endlessly available. Which would you prefer to have?
The downside to all this is unemployment and such like trivia.
Without a unit of account like gold (not doing the gold bug thing – making an observation) – imbalances are not constrained. Gold is limited and thus self corrects or at least has such feedback loops. Our present arrangement does not – and at some point when things are out of balance enough, long enough – that too has consequences.
A hole has been dug. I will not pretend to know how to fill it. But we can all likely agree it can’t continue as it is now – so any corrections, regardless of their origin or demeanor – are a move back to some sense of long term stability.
Actually, the 11% of Americans and others that own 76% of US wealth (and their required Chinese communist partners) have made lots and lots of money. They set p factories in China to export to US and EU. They made the US government not retaliate despite the abuses that Trump is now correctly trying to renegotiate.
These people have profited from huge US trade deficits that have drawn wealth out of the US and deprived US workers of job opportunities previously available. They have largely destroyed-emasculated unions. I am very surprised that with his advocacy for the rich it is Trump that is trying to renegotiate this. He is no FDR. I am skeptical about what he will actually get in the negotiations with China… Will they last past November’s election? I suspect so.
“Whatever will come of this, one thing is for sure, Trump rattled some nerves and got China’s attention.”
I doubt that, Xi just finished consolidating power. China is united and full steam ahead pushing their agenda of global free trade. Trump’s America will be pushed aside, at least until the DEMS win back at Midterms.
You’re funny, dude. Dems are not known for getting anything done. They are the experts in the art of pontificating and twiddling one’s thumbs.
China is united and full steam ahead pushing their agenda of global free trade.
You voted for our current PM, right? Just a guess. He is similarly enamoured with China, and for many of the same misguided reasons you are. China has zero interest in “free” trade. They want a continued trade surplus so they can use the foreign FX they earn to purchase foreign assets and gain control of willing dupes like Canada. And people like you will cheer them on.
I’ll make an impertinent observation: instead of wanting to free up US corps operating in China, how about Trump and his Republican Congress telling US corps that they cannot relocate operations or production to China, either as themselves or through subsidiaries? Why is it up to China to do something about US corporations moving production to China? They’re our companies–let’s tell them to cut the crap.
Also, given the state of Chinese debt, if I were China I’d concede everything to the Americans viz. financial firms coming in. Let these US behemoths swallow some of the lousy debt being generated in China. What a poison pill that would be. If the Americans demand that they take the poison, give it to them.
Because the US corporations are bigger than most countries and control our congress. It’s called the “revolving door”. I mean hell look at the candidates that have served or ran for office. Look at Pelosi, D. Isa?, etc. All major major elites with big stakes in corporate America.
The US needs the following and NOW:
1) No one with big corporate ties can ever serve in government. I don’t care. EVER! Plenty of smart intelligent men and women of modest means who would be great public servants. Why the rich elite, or worse lawyers? Maybe we need less experienced people from now on as crazy as that sounds?
2) Fricking term limits! 8 years! If you can’t accomplish anything bam you’re done! Finished! Get out! We have 300+ million people in the US and plenty of eligible people to give a try to.
It’s really not that hard to change our country but the American people have lost their resolve, their fight, their balls! The proles love their football and beer and the middle class would never give up their Hawaiian vacations and 401k’s! and McMansions
Stephen Roach says the trade deficit exists because Americans don’t “save” enough. Why is this idiot treated as some kind of expert?
You said this, “Why is this idiot treated as some kind of expert?”
Roach said, I am quoting from your post, ” . . . says the trade deficit exists because Americans don’t “save” enough.”
Here’s my take, and I am not qualified to judge Roach’s level of intellect: Americans spend like drunken sailors, buying on credit what their income cannot buy. Federal Reserve personal credit statistics trends support this factoid.
It is also my observation that Americans buy — ON CREDIT — stuff they do not need, but merely want, and stuff that will be put into a storage unit — or in a trash bin — sooner rather than later. They buy stuff they do not need . . . with money they do not have.
Is it not true that buying with money that you do not have is the same as “saving less”, which, given the use of credit, is the same as SAVING ZERO ?
Again, ignoring Mr. Roach’s possible intellect deficit, could it be that by saying Americans don’t save enough — he really found a polite way to say that the “American propensity to SPEND EXCESSIVELY USING CREDIT” — is a large cause of the trade deficit (and possibly a poor lifestyle choice)?
Seems to me that “saving too little”and “spending too much” are really two equivalent phrases.
I can’t think of any reason why saving too little means that foreign goods have to flood into the country. Or “spending too much” either.
Most manufactured goods — sold in the ‘Now Great Again’ USA — originate in foreign lands.
So people spending too much, after food and housing (much of F+H is originated locally) — NECESSARILY MEANS BUYING FOREIGN, which increases the deficit.
This comes from one of the accounting “identity” formulae John Hussman mentions frequently. I am not even an armchair economist, so I won’t explain them here, but they are true and applying them works:
“The U.S. economy: sector by sector”
“Gross domestic product (GDP) is equal to consumption, plus real investment (factories, housing, capital equipment), plus government spending, plus exports, minus imports. This isn’t a theory. It is simply an accounting identity, but we can understand a great deal about the state of the economy by examining these components individually.”
There are others. The one above is not the best example, but the point is clear — if income is insufficient, people borrow to spend. SINCE THEY ARE SPENDING ON FOREIGN GOODS (necessarily) their “borrowing to spend” adds to the trade deficit.
This is so true it is beyond any discussion. The TRADE DEFICIT is driven by personal consumption plus corporate consumption of foreign goods. A true statement.
Such a good comment as spending pre FLOOD was, presumably, the same amount per disposable income, in theory. However, back then, people saved to buy a TV (white goods) in the 80’s and that was a big purchase. So I dont think the flood is good. But I think its a combination of cheep goods and easy credit to buy them (predatory lending) which added fuel to the fire; which let people spend more/save less (eveyone loves more stuff and spreads the money). But back to your point, If we never let the flood in, would we have been better off? (keep factories at home and wages up) I like the idea of an equitable world and spreading wealth, but if we kept the norm and didnt offsore, would we be in a better place? I mean, if we look forward 100 years and all cost bases are the same (no more cheap labor) we have made a sacrifice of our own wealth and prosperity for the greater good of man kind (or one could say, the corporations F’d us for a century now what do we do). Meaning, will we all be better in a better place, in the end, with average profits, higher wages, labor bargaining power, benefits, 401k, full time employment, then we are now? It will come full circle in one way or the other; we will all be out of poverty, serving the Top 20-30% but we will have security; I hope.
Reply to ScottS71,
Thoughtful comment, and well said.
Well the future is, after all, unknowable, is it not ?
We do not know, and can not know what would have happened if past events ( e.g., NAFTA or M.F.N status for China ) had unfolded differently.
THIS WE DO KNOW (but causality IS NOT established) POST NAFTA and M.F.N. China, the middle class has lost a large amount of ground, the top 1% has gained massively,
and wealth inequality has widened substantially.
The insecurity that the middle and lower classes are now feeling, will reverberate Loudly and Longly in the coming decades.
What would TODAY be like if the PAST had unfolded differently ? We can not know — but, IMO — it could not be worse than it is now.
Can’t be proven one way or t’other, but it just might be worth trying something different.
What do you think ?
So a new Japanese pick-up truck built outside the USA has a 25% tariff tacked onto its price? If true, this explains a lot about huge truck prices
The Toyota Tundra was the first full-size pickup truck sold by a foreign automaker in the US, and because of the tariffs on imported pickups, it was manufactured from day one in the US. That’s the good side of tariffs. The bad side is that prices of pickups have bloated profit margins embedded in them, in part due to the stifling of foreign competition by tariffs, in part due the oligopolistic pricing behavior by automakers, and in part because consumers love paying a lot of money for pickups.
but, 60k on a big ol’ powerful pick ’em up is an investment, and, because it weighs so much, you get to write it off right away if it’s a business purchase, and then to fill it, it’s $120, which you do right after fossil-fueled harvesting the corn that gets transported by fossil fuels to be heated by fossil fuels and then transported by fossil fuels to blend with fossil fuels that go into the truck which is made with national security steel, or better yet, aluminum, because, ya know, it saves gas.
sitting up high does make one feel powerful, though. give the customers what they want, which is tariffs, which is what this thread is about, right?
Three cheers for your excellent post !
And it also made me smile a bit, too.
I don’t fully understand it, but dudes seem to love buying huge, gas guzzling trucks. Could be partially explained by the fact that women seem to prefer a man who drives a great big, fully loaded (and nearly new) truck. Over 90% of all pick-ups are never used as trucks (unless you count luggage carried to/from the airport). Why risk putting a load of pea-gravel or manure in a brand new $75,000 truck? – it would ruin the resale value!!! The pick-up truck bed is really just for show.
I know a guy who owns one of these things and recently he had to pick-up some sheathing at the lumber yard. He rented a cheap pick-up at U-Haul. After all, why risk scratching the pick-up bed when you can rent a truck for $19.99.
I’m beyond judging anyone’s behavior, for anything, anymore. People do what they do, everyone has their reasons whether or not it makes logical sense – that’s what makes them human and you will never change that fact. Buying giant, expensive pick-ups to use as personal commuter vehicles makes no sense, but neither does genocide or mass murder – people do inexplicable things, they always have and they always will.
I tried really, really hard not to post twice – quitting after this – but, sir, you nailed it:
“People do what they do, everyone has their reasons whether or not it makes logical sense – that’s what makes them human and you will never change that fact. ”
People who expect other people to be logical really fail to view the whole of our assistance through this lens. We really can’t be fixed – and the oil will run out much sooner than folks realize (likely in my lifetime – but not tomorrow or next decade).
I like to joke with friends that my grand parents grew up with outhouses and died with flushing sh*tters and my grand children will grow up with flushing sh*tters and die with outhouses.
That or the bit about dudes drag racing plow mules in summer so the chicks will dig them in winter. Take your pick!
Good information, Wolf. When SUVs were invented with the Ford Exploder….er, Explorer, automakers found that designs that were cheaper (truck chassis for a car) made them a lot of money.
Now, what I see for pickups is expanded sheet metal with lots of air underneath: the taller the truck, the more $10,000-markups can be added to a “truck”. These bulkier trucks are more difficult to park, and offer no more utility for 98% of hauling that is done.
What is even worse, is now days the smaller pick ups (Tacoma, new Ranger, Colorado, Canyon) are just as if not MORE expensive than a full size truck? It’s actually insane.
Dow up 500 points. Again, “Trade War” has been overblown.
That’s just the weekend dip buyers, it didn’t even reach the Friday high and has already fallen 200 points this morning. Look at the chart since January, every dip is met with a weak pump up, with a lot of pump and dump going on you might want to give it a couple days before claiming it is overblown.
Buy the dip – never fails (?).
Only tricky part is knowing when to buy the dip.
Based on the Dow today, go with 3:30pm on a Friday lol
How is this going to help? Even semiconductors are sensitive.
What outcome are we going to see – higher trade deficit!
Also conspicuously absent is the US gas. But the deficit dynamics are not going to show until some time from now. So China will promise to do that and to do this, but nothing of the sort that really change its position relative to the United States. Nothing can change the fact that the US economy is not competitive internationally and even political arm twisting may only help somewhat and for a limited period of time.
With this seesawing of information and the corresponding gyrations of the Market, plus the links of the Administartion to Wall Street, who behind the scenes knows about these details of negotiations and objectives?
It isn’t exactly like insider trading as per Steve Cohen and ilk, but it is ceratinly worth trading upon.
Before someone says, “It simply isn’t true or possible”, I need to remind them of the nature of this current Govt. It leaks like a sieve about absoutely everything.
Trade war, not a trade war….reciprocity….tariffs but exclusions….new negotiations ongoing…etc
a 2% move properly hedged can make good money, then do it again.
i dunno, that would be cheating.
So this will be an organized trade war and not just a scrum. The difficulty will be applying these things unilaterally, as well as precision targeted tariffs on China. What does Europe think? The global economy has so many work arounds, the biggest lie is that China contains capital flight, or wants to. One thing all the analysts seem to agree, China is only going to become a greater economic force. Is a centrally planned economy really going to work? https://www.realvision.com/exodus-from-us-assets/#.WrMAx6Ak8Rg.twitter
China’s transformation to a consumer society is not going to happen. What is the purpose of all this commerce and infrastructure, the Belt and Road initiative? Talk about your bridge to nowhere.
a. idle hands are the devil’s workshop.
b. building belts and roads are all well and good, but they can run both ways.
To take one example, consider a place like Dubai, UAE recently allowed China visa on arrival, Chinese tourist arrivals shot up 100% in a matter of months. China’s middle class may be small when compared to their entire population, but it still constitutes several hundred million people (more than the US in fact)….and they’re growing richer all the time. The Silk Road is a true game-changer.
I think China’s centrally planned economy is more organized then the U.S. central planned economy and thus has a better chance of success then the hodge podge mess being thrown together by well healed lobbyists on K-street, each acting in their own interests.
BTW, if we are going to start a trade war, why not slap a tariff on every company receiving negative interest rate funding from Mario Draghi. We could start with Mercedes – they have sold a large quantity of bonds to the ECB that pay negative interest rates. Without a doubt that is not a level playing field – time for a 50% to 100% tariff.
“Art of the Deal” paired with Trump’s awful media feud is a strange beast. For all I know he may get results at an enormous political cost. The early denunciations in my newspaper were loud and unanimous. AP, New York Times, Bloomberg, all sworn enemies. I suppose an opening PR ploy invites trouble.
Using steel tariffs as the shot over the bow was a way to do two things at once: 1) get China to the negotiating table; 2) bolster support in the states that handed Trump’s electoral victory to him.
Note who is sending the “to-do” list (love that euphemism, BTW) and who is receiving it. If China were in a position of strength, it would reject “to-do” lists out of hand, and giggle at our insouciance.
Trucks are no longer a concern. U.S.-based manufacturers have already bolstered production in Mexico which is now a permanent economic vassal with no negotiating power and a plentiful, hungry labor force. I suspect Trump will offer the Chicken Tax (25% tariff) as a face-saving concession to China. To compete with cheap Chinese truck imports, U.S. manufacturers will shift assembly of Canyon/Colorado and the new Ranger to Mexico and flood the market with high-mpg, low-content, low-status versions in order to meet ever-tightening CAFE requirements. Giving up the Chicken Tax is actually a win for the U.S., if we need to import large numbers of small trucks built elsewhere in order to meet CAFE targets.
Trump will also continue to float myriad possibilities for actions he may or may not take, and under which regulatory authority he may act. This forces China to game a much wider array of possibilities and makes the development of a counter strategy orders of magnitude more difficult.
Was this on the ‘to do list’?
from MarketWatch: “China’s yuan-denominated crude-oil futures surged on their long-awaited debut Monday, indicating positive initial sentiment toward the new market, which Beijing hopes will eventually give the country an oil benchmark to rival those in the U.S. and Europe. ”
If this is successful it is the beginning of the end of dollar reserve status.
The media has just bubbled over on this. Thank God that we have a “trade war” going on, or else yuan-denominated oil futures trading would have been the only thing we would have heard for the past five days :-]
This is just a PR job to get this topic into the media. Producers will always sell to the highest bidder, not matter what the currency, as long as the currency is a convertible currency, and buyers will always buy from the lowest-priced seller, as long as the seller takes their money. That’s what makes a market.
The entry of the yuan into the IMF’s basked of SDRs also caused a lot of speculation that it would kill the dollar’s reserve currency status. And the opposite has happened.
These things happen because China has become an economic powerhouse. And they should happen. But it’s not going to kill the dollar or its status as reserve currency.
An interesting side effect of a trade war could be a financial crisis in China. China’s banks are much weaker than they want the world to know. Of course Trump will be blamed, but China has been putting this off for a long time, and eventually it’s going to happen.
Wolf, long time lurker here.
Is “the China” an intentional trumpism? This did make me laugh ;)
Regards and respect for a great resource you provide
No, not nearly as cute. It’s leftover from a last-minute edit that changed “…wants the Chinese to…” to “wants China to” and “the” inexplicably survived :-]
This “war” consists of three parts; maintaining the USD as reserve currency, fixing US trade, and keeping the US military the biggest!
Clearly, in leaking these negotiations and the existence of this to-do list to the financial press, the White House is hoping to calm the markets. . .
Because the markets don’t go down on trade war talk alone. But they go up on trade war easing talk alone. What goes down, must come back up. At any and all cost.
Holding China companies that trade here , is asking for trouble.
These stocks go really start tumbling.