Trade War Update: Chinas Back Is Up Against The Wall

 forbes.com  10/18/2019 15:39:29 
President Trump Meets With China's Vice Premier Amid Trade Talks In Washington

President Donald Trump and Chinese Vice Premier Liu He in the Oval Office on October 11, 2019 ... [+] following the announcement of Phase 1 of a China trade agreement.

Win McNamee/Getty Images

If the trade war was a Halloween horror movie, the Chinese just ran into a room with no way out. Dont fear! There might be an escape hatch somewhere.

Exactly one week ago, we got word that President Trump and China Vice Premier Liu He agreed on a mini-deal, called Phase 1. Call it an IP for soybeans deal. The concern is, and remains, that hardliners in the Chinese Communist Party, and maybe even Xi Jinping himself, will renege on the deal.

Peter Navarro doesnt think so. He thinks Chinas back is against the wall. Some data points suggest he is right.

Ignore the posturing and just look at whats on the table, Trumps trade and manufacturing director Navarro told Maria Bartiromo this morning on Mornings With Mari on the Fox Business Network.

Whats on the table in Phase 1 is enforcement mechanisms, intellectual property, and the end of forced technology transfer for joint ventures with Chinese firms and currency manipulation.

Another part of the deal includes China spending upwards of $50 billion on U.S. farm commodities over the next 12 months and full financial market access into Chinas booming financial services industry, whichand this is unclearcould be a boon to credit card companies like Visa and MasterCard that have almost no presence in mainland China.

TRUMP TARIFFS

Peter Navarro, director of the National Trade Council, says he is "bullish" on trade negotiations ... [+] with China as well as with Canada and Mexico.

Andrew Harrer / 2018 Bloomberg Finance LP

This is a robust phase one package, Navarro told Bartiromo. You always have to be skeptical ... (but) theres something good in place now. I think China has gotten the message that they need to play fair with the rest of the world.

China may not have gotten that particular message, but they have gotten the message that U.S. companies are slowly moving out of China. Moreover, Chinese manufacturers who serve U.S. companies are also relocating.

The latest trade data shows that Chinas exports to the U.S. have continued to decline. Total shipments fell 22% in September. The decline was driven by items subject to tariffs of at least 25%.

Trump agreed not to go ahead with increasing tariffs to 30%. The December 15 tariffs on some $150 billion worth of Made in China consumer goods are still on the table.

According to U.S. Census data, Chinese exports of products that face higher tariffs have plummeted by over 30% over the last 12 months and year to date. Nontariffed products are still flowing into the country, up 10%. The comparison shows that tariffs are restricting trade flows as American firms have either loaded up on goods in order to avoid tariffs before they went into effect or have been successful inremapping their supply chain. 

All of this could be why China is willing to play ball on intellectual property in particular, after balking on it back in the spring. The U.S. has long believed that exchanging technology secrets in order to get into China was a trap. Americans wanted to be in China. But they might have been giving up the goods in order to do so, helping China advance quickly and setting them up to compete with U.S. firms thanks to technology many of them either didnt develop themselves or outright stole from U.S. companies.

Meanwhile, Chinas old school manufacturing sector is suffering from collateral damages, says Aidan Yao, the senior economist for AXA Investment Management.

The secondary industry, which captures mostly industrial and manufacturing activities, has accounted for most of the GDP growth slowdown so far this year, says Yao. Thats 5.6% growth in the third quarter versus 6.1% in the first. Not negative, but clearly moving in the wrong direction for Beijing policy makers.

Manufacturing surveys show a growing number of foreign firms hightailing it out of China. Hard evidence of this supply-chain adjustment is largely anecdotal, but that depends on who is being surveyed. Coca-Cola isnt going anywhere. But companies manufacturing electronic components and stitch-and-sew factory work is leaving for Vietnam, Bangladesh and, in some cases, even Colombia, according to companies and law firms Ive spoken with recently.

The risk of companies putting money where their mouths are will rise as the trade war rages on, says Yao. Getting a deal done quicklyto restore some confidence back in the economyis key to mitigate these long-run risks on Chinas competitiveness.

See: China Not Really Killing American Agribusiness  Forbes

CHINA PORT

The Yangshan Deepwater Port in Shanghai. American multinationals have helped make China the largest ... [+] exporter in the world. Decoupling from China does not bode well for its export-heavy economy. China has 6 of the world's 10 largest ports. Photographer: Qilai Shen/Bloomberg

2019 Bloomberg Finance LP

Bloomberg reported on Thursday that Beijing is still in the throes of finalizing an agreement in writing. Citing Ministry of Commerce spokesperson Gao Feng, Bloomberg noted that they are not quite on the same page with Washington yet again.

Feng said Beijing needs further talks before it is ready to sign the agreement. Both sides are still talking at high levels, led by U.S. Trade Representative Robert Lighthizer.

Fengs view of things can easily be interpreted to mean that Xi is not ready to bless Liu Hes mini-deal of last Friday. Both Xi and Trump will meet at the APEC Summit in Chile four weeks from now. The market is hopeful they would have ironed out any kinks in the agreement by then.

Other tensions related to Hong Kong and the detention of Uighur Muslim minorities in Western China could sour hardliners further and convince Xi to press the no deal button.

On the other hand, the economy is flashing caution signs everywhere.

Premier Li Keqiang is urging once again that provincial leaders do all they can to tackle the economic slowdown. His concern is a testament to top officials sensing a steeper slowdown is possible.

Decoupling from the U.S. may be of interest to some in the Communist Party just to get Washington off their backs, but it would come at great risk to an economy that needs jobs, especially for blue-collar workers rather than the computer engineers Beijing touts as its future.

Liu Liange, Bank of Chinas chairman, said the last round of talks between Liu Hes team and Lighthizers made substantial progress.

Nepal China

Chinese President Xi Jinping will have the final word on the Phase 1 trade agreement reached last ... [+] week in Washington.

Bikash Dware/The Rising Nepal via ASSOCIATED PRESS

The global economys downturn is increasing along with other uncertainties. A healthy and stable bilateral trade relationship is beneficial for both sides ... and the world, he says.

Navarro said on Fox Business this morning that Lighthizer was engaged fully with senior Chinese officials, adding that investors should be as skeptical of the noise in the press as they are with Xi agreeing to Phase 1.

I think those discussions are what matter, not what appears in the Peoples Daily or in the American press, he says. Weve got the best negotiators in the world. Im feeling good about that, and I feel bullish today.

Investors were not feeling very bullish early Friday. All major indexes were trading lower, with the Shanghai Composite closing 1.3% lower today. Both the S&P 500 and the Dow were trading only marginally lower at less than half a percent off from Thursdays close in late morning trading.

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