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Markets are still getting the Trump trade war wrong

Rick Newman
Senior Columnist

There will be a meeting. The presidents of China and the United States will talk. They’ll both probably say it was a nice chat.

But the upcoming confab between Presidents Donald Trump and Xi Jinping is very unlikely to break an impasse on trade between the two countries that is rattling the global economy. Trump and Xi will convene during a gathering of global leaders, called the G20, in Japan on June 28 and 29. This is the first thaw between the two countries since Trump raised tariffs on Chinese imports on May 10, and China retaliated with punitive measures of its own.

Stocks rose when Trump announced the meeting with Xi, as if two proud and stubborn autocrats will hash out their differences and fix everything. Some analysts recalled a similar meeting between the two men last November, which led to a delay in threatened tariffs and a temporary respite in trade hostilities.

But three things are different this time, which is why hopes for a breakthrough are unrealistic. First, negotiators for the two nations plucked the low-hanging fruit earlier this year, leaving only the thorniest problems to work out. Second, both sides have escalated, leaving less room to maneuver. And third, Trump is now fully embroiled in the 2020 presidential campaign, with politics driving his agenda—something Xi is fully aware of, and likely to exploit.

Trump has so far managed to hurt China with tariffs, without wrecking the U.S. economy. But his tariffs are a tax on U.S. consumers and businesses that has caused harm on the margins, with manufacturing activity on the decline and businesses growing reluctant to invest amid trade hostilities.

A breakthrough is ‘unlikely’

Trump’s next threatened step—imposing 25% tariffs on $300 billion worth of consumer goods imported from China—could trigger a more serious downturn and possibly a U.S. recession. Will he do it?

Probably not all at once. The recent on-and-off tariffs on Mexican imports, which began at 5%, could tip Trump’s hand on China. Ed Mills of Raymond James & Associates predicts that if there’s no breakthrough in the meeting with Xi, there’s a 75% chance Trump will resort to new tariffs on Chinese imports in July. But Mills thinks the tariffs will more likely start at 5% and rise gradually than start at 25% right off the bat.

Chinese President Xi Jinping raises his glass and proposes a toast at the end of his speech during the welcome banquet, after the welcome ceremony of leaders attending the Belt and Road Forum at the Great Hall of the People in Beijing, China, April 26, 2019. Nicolas Asfour/Pool via REUTERS

The sticking points between the two countries aren’t likely to be resolved just because the two leaders meet. A trade breakthrough at the meeting is “very unlikely,” says economist Paul Sheard of Harvard’s Kennedy School. “The current trade dispute between the U.S. and China is not amenable to a quick or easy solution. To satisfy the Trump administration would require China to change fundamental aspects of its Party-dominated State-led capitalism model.”

The Trump administration for instance, wants China to stop stealing U.S. technology, end subsidies for huge state-owned companies and let U.S. firms operate more freely in China. And it wants China to pass new laws that would formalize such changes. China does cheat on trade, but it is nonetheless unlikely to cave to outside pressure to change the basic nature of its economy.

So even a pleasant meeting between Trump and Xi is unlikely to produce much. This means Trump will most likely be in the unenviable position of escalating tariffs and other measures that hurt American business and consumers—while running for reelection. The political timing might even compel Xi to string Trump along and dare him to escalate in the run-up to the 2020 election, perhaps contributing to Trump’s defeat if American voters revolt.

Instead of paving the way to a breakthrough, the upcoming Trump-Xi meeting might even cement 2019 as the Year of the Tariff. A trade breakthrough “will be harder to attain than most realize,” Mills of Raymond James wrote recently to clients. “We do not expect China trade risk to be resolved in 2019.” That leaves 2020—or never.