The Trade Truce Won’t Last

0
225

by Jim Rickards, Daily Reckoning:

“I will not be the one to break the peace we have made here today.”

With those words, the Godfather, Don Corleone, played by Marlon Brando, ended the war among the five mafia families in New York. This peace was hammered out at a dinner among the heads of the five families.

This weekend the eyes of the world were on Buenos Aires, where President Trump, China’s President Xi Jinping and some top aides had a private dinner to discuss the current China-U.S. trade war. When I saw the photos of the dinner on Sunday morning, my mind flashed back to the dinner scene from The Godfather.

Trump in China

In the movie version, no one in the room trusted anyone else. But all of the participants deemed it in their best interests to make a peace treaty so they could return to their illegal businesses without the disruption of hit men, police investigations and vengeance. There would be time for that later. In the short run, it was time to normalize the situation.

The same dynamic prevailed in Buenos Aires. All of the key parties were at the table. Trump’s team included Mike Pompeo (secretary of state), John Bolton (national security adviser), Robert Lighthizer (U.S. trade representative) and Steven Mnuchin (secretary of the Treasury) among others. The Chinese team was led by President Xi Jinping and included the top figures in Chinese trade and finance.

No one trusted anyone from the other side. Trump knows the Chinese have lied about their good intentions on trade for decades. Likewise, the Chinese know that the U.S. does as much hacking and surveillance aimed at the Chinese as they do to us.

Fans of The Godfather know that the “peace” arrived at in the dinner scene did not last long. In due course, Michael Corleone takes over the Corleone family. When Don Corleone dies, Michael plots his revenge on the rival families. In the climactic scenes, all of Michael’s top rivals are assassinated. This results in peace being restored because there is no one left to oppose Michael and his power is dominant.

The same is true in the trade wars. What happened in Buenos Aires is like a truce or a timeout, but the war itself is not over.

For his part, Trump agreed to delay imposing new tariffs on China after Jan. 1, 2019. Specifically, increased tariffs (from 10% to 25%) on $200 billion of Chinese imports will not go into effect. For his side, Xi agreed to buy a “very substantial” amount of increased U.S. exports from the agricultural, industrial and mining sectors of the U.S. economy. Meanwhile, both sides agreed to new negotiations on forced technology transfers, financial cyberattacks and theft of intellectual property.

This agreement has a 90-day life. If substantive progress is made, the concessions may be extended along with new structural agreements that reflect progress on the issues to be negotiated.

If the negotiations are a failure, then the U.S. tariffs will be imposed and China will presumably resume its bad behavior in the intellectual property and cyberattack arenas (if they ever stop it in the first place).

Based on past behavior, the prospects for an end to the trade war are not good. While this pause may benefit both sides for political reasons, none of the underlying issues have been resolved and the likelihood of resolution is still low.

The Chinese are infamous for playing for time. They offer some happy talk and vague promises, and negotiating partners such as the U.S. accept the offer in the hope that “this time it’s different.” It never is.

The Chinese did not offer to buy a specific quantity or specified amount of goods from the U.S. They agreed to opaque phrases such as “very substantial.” (How much is that, exactly?) The Chinese also offered to address “legitimate” U.S. concerns about theft of intellectual property. What if the Chinese don’t consider our concerns to be “legitimate”?

Read More @ DailyReckoning.com

Loading...