American business leaders are on record acknowledging their country’s trade difficulties with China can’t be solved overnight, one of the many harsh realities of economic competition between two world powers.
Why, then, have U.S. financial markets moved in tandem with incremental developments in President Trump’s fight to reach a trade deal in a matter of months that stymied predecessors for decades? The answer lies in the dual realities of the affected politicians, executives, and investors, each of whom is embroiled simultaneously in both a long game and a short game.
In the former, corporate America writ large wants a more level playing field with China, whose aggressive drive to industrialize has prompted its government to wall off markets and require U.S. companies to hand over trade secrets as a condition of doing business in the world’s second-largest economy.
“The Chinese are bad economic partners,” David Scissors, a resident scholar with the American Enterprise Institute who focuses on the Chinese economy and opposed the Trump administration’s tariffs, told Washington Examiner. “We need to fix that relationship, but there’s going to be a cost.”
That cost is where the short game comes in: Economists, executives, and even lawmakers from the president’s own party have warned for months that the tariffs he imposed on $250 billion in Chinese imports risked undermining the benefits of GOP-led tax cuts in 2017 and slowing U.S. growth overall.
The S&P 500, a widely followed gauge of U.S. financial markets, dropped for three straight days in June when Trump decided to place duties on $50 billion in Chinese imports in an effort to wrest concessions from Beijing and eliminate a trade imbalance between the two countries.
It tumbled again in September when the White House announced duties on additional $200 billion in shipments, before rallying when Trump and Chinese President Xi Jinping agreed in early December to a 90-day detente to allow for talks. The index then rose for three consecutive days during low-level negotiations in January.
“From a market standpoint, ultimately what matters is that there’s an agreement in place that enables countries to forego and remove tariffs,” said Tony Roth, chief investment officer for Wilmington Trust, which manages $83.5 billion in assets. Now and in the immediate future, “that is far more important than the nature of agreement itself,” he told Washington Examiner.
The size of the short-term risk from tariffs is evidenced in companies like Apple, which warned investors in early January that quarterly sales would be about $9 billion lower than expected. CEO Tim Cook blamed the shortfall on the timing of iPhone launches and supply shortfalls for new products as well as slowing growth in China, a key market.
The country’s economy has been hurt, in part, “by rising trade tensions with the United States,” Cook said in a letter to investors. “As the climate of mounting uncertainty weighed on financial markets, the effects appeared to reach consumers as well,” he said, and traffic to Apple stores in the country dropped.
Apple’s own stock tumbled afterward, dragging the S&P 500 down a jarring 2.5 percent and prompting Trump to suggest the decline was related to a new Democratic majority in the House of Representatives rather than his own policies.
“The China talks are going very well” and the country’s slowing economy “gives them a great incentive to negotiate,” the president told reporters as he left the White House on Jan. 6 for weekend meetings at Camp David. “My relationship with President Xi is as good as any relationship that a president here has had with a president or leader in China, and I think good things are going to happen.”
Scissors is far less certain of that. The current talks “are a total fraud,” he said. “This is about whether the president wants to pretend we have a deal with China in order to help the stock market. Nothing can happen of any importance by March 1,” when the truce agreed to by Trump and Xi expires.
Jamie Dimon, the head of the largest U.S. lender, JPMorgan Chase, made a similar point at a banking conference in early December.
“There’s no way you can finish the complexity of these trade negotiations in 90 days,” he said. “I’m hoping they’ll announce they’ve made enough progress to continue negotiating.”
Should the detente end without a deal in place, however, the White House has threatened to more than double tariffs on $200 billion in Chinese imports to 25 percent as well as add duties to another $267 billion in shipments.
A more optimal outcome, said Scissors, would be China agreeing to take specific actions by mutually established deadlines — buying specific amounts of U.S. grain, for instance — with U.S. Trade Representative Robert Lighthizer retaining the right to raise tariffs if Beijing failed to make good on its commitments.
“The ideal isn’t no deal,” he said. “The ideal is if we make a deal, we have specific actions that we’re going to take by specific dates if the deal hasn’t been kept.”
While Scissors hasn’t given up hope that the U.S. will win something beneficial from China, he says, using tariffs to negotiate is akin to wielding a broadsword when the U.S. would be better served by a scalpel.
What Scissors had recommended to the administration earlier in Trump’s term was punishing individual companies for bad behavior — which he argues would have driven China to make changes without the collateral damage caused by across-the-board levies.
“Tariffs punish large groups of people,” he explained. “They punish American consumers. They punish a whole bunch of Chinese companies who have done nothing wrong. What we want to do is say, ‘You are receiving improper subsidies, we’re going to target you. You have benefited from stolen IP, we’re going to target you.'”
