Washington Insider: Trade Tactic or New Policy?

Suddenly, U.S. trade policy became murkier this week as policy analysts offered a “variety of interpretations of President Trump’s latest tariff threat,” Bloomberg said this week. Some, like Goldman and Citi, are optimistic a U.S.-China deal can still be reached. Others, including Raymond James and Cowen, are more cautious, warning the process may have been derailed, and point to rising global risks. Investors weren’t happy about the news, with the S&P 500 dropping by as much as 1.6% in early Monday trading, the most since March 22. Tech and machinery companies were hard hit, with Alibaba Group, Apple Inc., Boeing Co. and Caterpillar Inc. all sliding. Bellwether banks such as Bank of America Corp., Citigroup Inc. and JPMorgan Chase & Co. were all falling 1.5% or more. Bloomberg ticked off the comments of several companies. It reported that Goldman believes a tariff increase may be “narrowly avoided,” putting odds that tariffs rise on Friday at 40 percent. “We will be watching whether a large delegation of Chinese officials comes to Washington on May 8, as scheduled; canceling would mean an agreement in the coming week would “seem very unlikely,” and would make an increase in the tariff rate to 25 percent “the base case.” China trade issues have “negative implications for the outlook for auto tariffs and passage of the U.S.-Mexico-Canada Agreement, Goldman thinks.” It sees the administration’s “willingness to risk a market disruption by threatening an unexpected tariff hike suggests that it might also be willing to risk the disruption that formally proposing auto tariffs or announcing the intent to withdraw from NAFTA might cause.” It added that it now “raised the probability that auto tariffs will be implemented later this year to 20% from 10%, and lowered the probability that USMCA will pass to 60% from 70%. Citi Bank’s Cesar Rojas said that they are “cautiously optimistic” on a U.S.-China trade deal in the second quarter, though tariff threats will likely “remain as a way to get concessions from China and to enforce the agreement.” Rojas had expected that as the Chinese economy stabilized, “China would be less willing to provide additional concessions to the U.S.” The new threat is “consistent with the U.S. adding more pressure on China to get these concessions.” The Trump administration “pays attention to equity markets,” which means stocks diving could lead to a retreat from implementing the tariffs threat. Even so, Citi Bank continues to believe “uncertainty is likely to remain high as the tariffs threat remains in place and second round effects from a reallocation of global trade remain underestimated.” Michael Zezas, of Morgan Stanley opined that the threat of higher tariffs may be “a pressure tactic to speed an agreement on pending issues such as existing tariff removal timing, details related to the enforcement mechanism and industrial subsidies.” Morgan Stanley expects a “re-escalation would be temporary, as market weakness would help bring both sides back together,” but warned that “any escalation inherently augments uncertainty and further undercuts risk markets, where a Goldilocks outcome was already priced in.” Ed Mills, Raymond James, noted that “the progress towards a U.S.-China deal has been up-ended with renewed tariff threats by President Trump... apparent balks by the Chinese (especially on tech transfers), and the threat of the Chinese delegation canceling this week’s round of negotiations,” he said. Conversations with Raymond James’s trade contacts point to “a universal belief that this is not negotiating leverage, but what was almost a done deal last week, has derailed in recent days. There is some hope that negotiations could be salvaged, but this situation highlights how tenuous any U.S.-China deal remains.” Bloomberg also said that contacts have revealed questions about “what led to the latest breakdown, and whether developments related to Venezuela, the Iran oil sanctions decision, North Korea’s weekend missile test, or lessening worry about the economic conditions in both the U.S. and China influenced the direction.” Geopolitical volatility spiking in recent weeks may signal “a more difficult path ahead for negotiations,” it said. For example, Compass Point’s Isaac Boltansky argued that “Beijing is sending roughly 100 representatives to Washington this week, which we view as indicative of their belief that a deal is within striking distance.” At the same time, he warned that “once attention turns from China to other trade matters–including the USMCA–market sentiment regarding trade policy could turn more cautious,” he said. Finally, Bloomberg cited Cowen’s Chris Krueger who said that the “return of Tariff Man” is “pretty shocking and surprising--even grading off the Trump Curve.” He offered several interpretations. The “cautious” one suggests “this is simply an intemperate tweet (s) by a president that can’t help himself during a rainy Sunday afternoon...The President really, really wants to see this deal finished by Friday and (perhaps mistakenly) believes this gives the U.S. leverage.” The "not-so-cautious" interpretation is that “this is not an outer-borough real estate transaction. Trump issued a Presidential Statement last week highlighting his gift as the world’s premier hostage negotiator; tariffs are a very dangerous hostage and we believe will be seen as both provocative and insulting by Beijing.” So, we will see. Clearly, the overall picture of the administration and the Congress’ trade talks continues to be difficult and confusing and should be watched closely as the 2020 elections approach, Washington Insider believes.