With the U.S. stock market recovering from the coronavirus pandemic, investors are wondering what, if anything, can halt its run.
One thing they are wary about is the prospect of a renewal of the U.S.-China trade conflict, because it could jeopardize prospects for a global recovery. While the phase one agreement reached in December seemed to put the issue on hold, there are rumblings that China, once again, is not living up to its part of the bargain.
The latest example is a letter from more than 40 American businesses and several trade groups to Treasury Secretary Steven Mnuchin, U.S. Trade Representative Robert Lighthizer and Chinese Vice Premier Liu He. It called for Beijing to step up purchases of U.S. manufactured goods as well as energy and other products included in the agreement.
While the letter was directed at Beijing, some observers have questioned whether it signifies that U.S. businesses are souring on the deal. I don’t think it does for a simple reason: Breaking the deal would leave them worse off than they are now.
Rather, I see it as an attempt to pressure the Trump administration to enforce the terms of the deal. This is understandable considering that the history of U.S.-China negotiations is replete with deals that China has reneged upon.
When President Trump began the trade conflict in the spring of 2018, he was adamant that this would not happen under his watch. He repeatedly claimed that the U.S. had the upper hand in the negotiations, because China was much more dependent on the U.S. as an export market than the U.S. was on China. Furthermore, he argued that China’s economy was weakening whereas the U.S. economy was strong.
Thereafter, duties on U.S. imports from China were boosted in several phases. By mid- 2019 Trump threatened to impose duties on virtually all goods China shipped to the U.S. Amid this, both he and aide Peter Navarro repeatedly asserted that Chinese exporters were bearing the cost of the tariffs, contrary to findings of independent researchers showing that U.S. businesses and consumers were bearing the brunt.
Then, just when it seemed the two sides were headed for a showdown in the fall, Trump signaled his willingness to reach an agreement in several phases. The most important element of the phase one round was the commitment by China to purchase $200 billion of agricultural and manufactured goods, energy and services over a two-year stretch. According to former national security adviser John Bolton’s account, Trump was motivated to reach an agreement because he believed it would improve his election prospects.
Yet, as of May of this year, China’s purchases of these items were less than half of the targeted amounts. Moreover, it’s not clear what Trump is prepared to do if the shortfall persists. Thus far, he has said the trade agreement is on track even though some U.S. officials have suggested otherwise.
So, what’s changed to make Trump more tentative now?
I think several factors are part of his decision making. The most obvious is that the 2020 elections are just four months away, and he is trailing presumptive Democratic nominee Joe Biden decisively in most polls. This weakens his bargaining position considerably, as the Chinese authorities understand he cannot afford to take as much risk now.
Second, the COVID-19 outbreak has heightened political tensions between the two nations. It has also made it more difficult for Trump to assert that he has been tough on China, when he previously lavished praise on Chinese President Xi Jinping for his handling of the pandemic.
Third, the pandemic has also altered perceptions of the relative strength of the two economies. Previously, China’s economy appeared to be weakening while the U.S. economy was solid. Now, China’s economy is on the rise as the incidence of COVID-19 has declined, while the U.S. is still trying to bring the virus under control.
These developments, in turn, have emboldened China’s leaders that the time is ripe to take strategic action in the political and military spheres. They are readily apparent in Beijing’s tightened controls over Hong Kong that include imposing national security laws on the city, its repression of Uighurs in western China and military maneuvers in the South China Sea, as well as the border conflict with India.
Weighing all that has transpired between the U.S. and China this year, President Trump is probably feeling boxed in and uncertain of what to do. He will not want to pick a fight now, because he already has enough problems to handle, and the last thing he needs is to take some action that will cause the markets to turn more volatile. Like Hamlet, I believe he will be decisively indecisive.
Nicholas Sargen is an economic consultant and a lecturer at the University of Virginia Darden School of Business. He is the author of “Investing in the Trump Era: How Economic Policies Impact Financial Markets.”