Is it safe to assume that China wants a meaningful trade deal with President Trump?  If not, that has very real economic ramifications and consequences for investing strategies.

Up to this point, discussions of the U.S. – China trade war often assumed the only question was when a trade deal would get done and under what terms.  The underlying assumption was that President Trump could get a trade deal if he wanted it, that it was just a matter of under what terms.  But is that the case?  It is possible China may not want a meaningful trade deal with President Trump before the 2020 election.  If so, why not?

President Trump tweeted the following as an argument for why China should make a trade deal before the 2020 election, “And then, think what happens to China when I win. Deal would get MUCH TOUGHER!”  While he may have thought he was making an argument for China to make a deal sooner rather than later, he instead may have reduced his chances of getting a trade deal, at least of any consequence before the election.

Imagine you are the president of China and you see that Tweet.  President Trump just told you he is going to be “much tougher” if he gets reelected and doesn’t have to run for reelection.  China’s leadership would logically then ask, “If this is what he is like to deal with when he is facing a reelection, what would he be like to deal with if he didn’t have to consider reelection?”   If they did ask that question, that would likely lead them to do everything they could to lessen his reelection odds.  One powerful way China could hinder his reelection odds – not make a meaningful trade deal before the election instead maintaining pressure on U.S. economic growth leading up to the election.    An ongoing trade war would further slow near-term U.S. economic growth, including in key battleground states, making President Trump’s reelection efforts that much more difficult.  The prospect of dealing with President Trump after the 2020 election could be leading China to prefer trying their luck with one of the Democratic presidential contenders instead of President Trump.    

If China’s leaders have decided they would prefer to negotiate with one of the Democratic contenders, it would make more strategic sense for China to delay a trade deal or at best, agree to a symbolic deal that does little to help the U.S. economy. China could be trying to run out the clock on President Trump hoping for a new negotiating partner after the 2020 election, and there are some indications this is occurring.

One thing we know is that President Trump isn’t getting much from China today.  If you doubt this consider the following:  Would President Trump being piling on tariffs, blacklisting Chinese companies, and threatening to remove Chinese companies from U.S. stock exchanges if China was making concessions and trying to get a deal done?  President Trump’s actions indicate China isn’t giving him what he wants, and progress isn’t being made.  You don’t implement punitive measures in the middle of negotiations when both sides are moving toward an agreement.  China is already doing little to make a meaningful deal, instead offering short-term “goodies” in the hope it will appease President Trump and put off additional tariffs. 

Some argue a trade deal will get done sooner rather than later because China needs a trade deal more than the U.S. This argument is based on the premise that the trade war is hurting China economically more than the U.S.  Even if that is the case, it overlooks a key fact:  President Xi Jinping made himself president for life, he is not facing a reelection.  Additionally, unlike in the U.S., China’s government has absolute control over economic policies, fiscal spending and its central bank.  President Xi can implement fiscal and monetary stimulus much more easily than President Trump bolstering the Chinese economy. 

Even if at some point President Trump proclaims he made a deal with China, it will be largely symbolic. China has little incentive to do anything to support the American economy before the 2020 election and President Trump is losing leverage each day the 2020 election gets closer. While it is not too much of a stretech to predict at best a “photo-op trade agreement”, the provocative question is whether China want to apply pressure to the American economy more than a meaningful deal leading up to the 2020 election.