March 1 has come and gone, and something important hasn’t happened: The Trump administration has not imposed new tariffs on Chinese imports, as threatened.
Markets are relieved, and, in fact, have been anticipating this very (non) development for weeks. That’s one reason the S&P 500 index has risen nearly 12% so far in 2019, a racy start to the trading year.
Trade fears have hung over markets for a year, going back to Trump’s imposition of steel and aluminum tariffs in March of 2018. Since then, he has hit about $250 billion of Chinese imports with tariffs, while threatening more tariffs if China doesn’t agree to major reforms in the way it runs its economy and treats American firms.
It’s not clear China will agree to any such reforms, yet Trump has relented anyway. This week, his top China negotiator, U.S. Trade Representative Robert Lighthizer, said there will be no new tariffs on the March 1 deadline Trump set late last year. While expected, this is modestly good news, which is why this week’s Trump-o-meter reads MEDIOCRE, our third-highest rating.
There are a couple reasons the Trump-o-meter isn’t more upbeat. First, the trade showdown with China is a confrontation Trump created, so he doesn’t deserve special credit for defusing it. Trump is generally right about China’s theft of western technology, the limits it puts on U.S. businesses operating there, and other trade abuses. But trade experts say tariffs are the wrong way to address the problem, because tariffs are taxes on Americans buying Chinese products. Better, they say, to join forces with allies and pressure China through existing institutions, such as the World Trade Organization.
Second, the trade spat with China isn’t solved. It’s just simmering at a lower temperature than it may have been a few months ago. There are actually mixed messages coming out of Trumpworld: Trump himself sounds optimistic, saying, for instance, “we are well on our way to doing something special” with China. But top negotiators such as Lighthizer and Treasury Secretary Steven Mnuchin suggest the two sides are still far apart on key issues.
Markets don’t really care if China makes the concessions Trump wants. Investors just want assurances there won’t be any more tariffs or protectionist measures that could disrupt business activity. The upward drift of markets this year suggests they’re feeling good about a deal. That may actually limit Trump’s options, because a hard-line approach now would change market expectations and probably induce a stock market rout that would rattle Trump himself.
Markets are also pleased with better-than-expected economic growth to end 2018, with growth for the year hitting 3.1%, the highest annual pace since 2005. That will probably slow in 2019, however, and a survey of business economists this week found that 52% think a recession will arrive by next year and 77% think a recession will hit by 2021. That’s a bit scary.
Otherwise, it was a lousy week for Trump. His former lawyer, Michael Cohen, spent 7 hours testifying before a House committee about crimes he says Trump committed, and other offenses ranging from racist behavior to poor grades in high school and college. And his “summit” meeting with North Korean president Kim Jong Un collapsed with no movement at all on efforts to rein in the rogue nation’s nuclear weapons program. With other things going wrong, Trump may have even more incentive to make peace with China and let markets celebrate.
Rick Newman is the author of four books, including “Rebounders: How Winners Pivot from Setback to Success.” Follow him on Twitter: @rickjnewman