Donald Trump is certainly predictable when it comes to being unpredictable.
While that might sound like an oxymoron, the United States President has taken a verbal “sledgehammer” to trade talks with China and a wrecking ball to Asian markets with his Sunday tweets.
In a few keystrokes, Trump put an accord between the world’s two leading economies at risk when he threatened to increase tariffs by 25% on Chinese imports worth US$200 billion if Beijing refuses to sign up to a detailed “enforcement mechanism.”
For 10 months, China has been paying Tariffs to the USA of 25% on 50 Billion Dollars of High Tech, and 10% on 200 Billion Dollars of other goods. These payments are partially responsible for our great economic results. The 10% will go up to 25% on Friday. 325 Billions Dollars….
— Donald J. Trump (@realDonaldTrump) May 5, 2019
Washington is concerned that President Xi Jinping’s administration will wriggle out of an agreement and fail to carry through with promises to further open up markets and curb excessive state subsidies to China’s corporate juggernauts.
Intellectual property rights and cyberspying are other vital issues which have proved sticking points when it comes to an all-encompassing policing accord.
“The reason enforcement has become central to this negotiation is the long history of China not living up to the spirit of the commitments it has made in the WTO and in bilateral negotiations with the US and other countries,” Edward Alden, a trade specialist at the Council on Foreign Relations, said.
“China can change its laws in ways that please the United States, but then use regulatory tools to thwart implementation,” he added.
Reaction from Beijing has been measured although round 11 of trade talks, which were due to start later this week in Washington between US Treasury Secretary Steven Mnuchin and Trade Representative Robert Lighthizer and Vice-Premier Liu He’s team, hang in the balance.
Geng Shuang, a spokesman for the Ministry of Foreign Affairs, confirmed that China’s delegation was “preparing to travel to the US.” But he declined to give a concrete date or say whether Liu would go with the party.
“We are now trying to get more information on the relevant situation,” he told a media briefing in Beijing. “What I can tell you is that the Chinese team is preparing to travel to the US for trade talks.”
Those discussions were billed as the “end game.” Now, Trump’s intervention could end this game of diplomatic cat and mouse in the short term, and send shockwaves through the global economy.
“Trump’s tariff threat is a trade negotiation strategy,” Wang Fuzhong, a professor from the Central University of Finance and Economics in Beijing, told TVB television in Hong Kong. “Both sides have actually reached a consensus in most [areas] but China has yet to reassure the US [about] intellectual property rights.”
Still, Asian markets went into meltdown on what can only be described as Black Monday.
Growing fears
Shanghai plunged by 5.58% to close down at 2,9o6.46 points while Shenzhen fell 7.38%. In Hong Kong, the Hang Seng Index dropped by nearly 3% along with Singapore.
Japan and South Korea were saved from the rout as the markets were closed there for a holiday.
“Stock markets surged earlier this year as investors assumed that a trade deal between US and China would be [agreed] soon,” Norman Chan Tak-lam, the chief executive of Hong Kong Monetary Authority, said.
“If the negotiation collapses, there will be a negative impact on global financial markets with a high risk of corrections,” he added.
So far, the US and China have imposed tariffs worth $360 billion in two-way trade since last year.
Yet as late as last Friday, the signs of signing off on a deal looked promising.
But that changed during the weekend with one White House source, according to the media, pointing out that the Trump administration was sick of hearing “empty promises.”
“I’m not sure we’re going to get all the progress we want,” Myron Brilliant, the executive vice president of the US Chamber of Commerce, told a media briefing. “We’re not likely to get the commitment we want on cutting back and eliminating subsidies.”
Joyce Chang, the chair of global research at JPMorgan Chase, also sounded a gloomy note.
“It’s making the outcomes more binary, with everybody focused on the Friday deadline,” she told Bloomberg Television.
“There doesn’t seem to be much leeway now to go past that. It’s going to mean that investors will be very focused on the trade issues even beyond China.”
Apart from market turmoil, the yuan also came under pressure, shedding more than 1.3% against the dollar at one point. To put that into context, it was the biggest fall in more than three years
“Investors will remain bearish on the yuan, as they reprice in trade war risks because the new developments are a reversal of previous positive progress,” Ken Cheung, a senior foreign-exchange strategist at Japan’s Mizuho Bank, told AFP news agency. “The news was unexpected.”
China’s next move in a diplomatic version of speed chess will be crucial.
Consumer sentiment
The economy has started to pick up during the past two months after a challenging end to 2018.
Factory activity improved in April, as well as consumer sentiment, which is still sluggish. The service sector has also expanded, a private survey by the Caixin Media group reported on Monday.
”In general, China’s economy looked resilient in April, especially in the services sector,” Zhengsheng Zhong, the director of Macroeconomic Analysis at CEBM Group, which is part of Caixin, said.
But any feel-good factor has been quickly replaced by Trump’s latest move.
“[He] has taken the proverbial sledgehammer to the walnut this morning and the only two words likely to be on the minds of traders and investors this week are ‘trade talks,’” Jeffrey Halley, a senior market analyst at OANDA, said in a note.
Chua Hak Bin, a senior economist at Maybank Kim Eng Research in Singapore, went even further.
“Risks of a full-blown trade war are escalating,” Chua, told the Bloomberg news agency before the statement from China’s Ministry of Foreign Affairs was released. “Trump’s threat may backfire as China will not want to negotiate with a gun pointing at their heads.”
What happens now, is open to debate, apart from expecting the unexpected.