No-Deal Trade Deal, Not a Done Deal!

Clear back in June I made the following easy prediction about Trump’s negotiations with the Chinese leader whose face can only be improved by a caricature:

The market finally fell in May after months of rising because it started to become clear there will be no Chinese trade deal in the near future. (It was always clear here, but most of the market willingly believed the president’s every tweet because it wanted to believe.) Prior to May, the market had been rising for months on Trump’s hot air about the Chinese deal coming soon because it had little other reason to rise.

“Breaking China Not as Easy as Toppling Tijuana“

Half a year and a lot of hot air later, we still have almost nothing just as I said this would turn out:

China will trump Trump…. The Chinese would far rather wait out Trump for a year and half than capitulate and get stuck for decades with a far worse economic situation than it has had…. The war has been waged, and its not going away.

China, I’ve stated, will outlast Trump because it has no election to worry about; it’s used to being long-suffering; so, China’s strategy is longterm gain over short-term pain. That is what unfolded this past week as I will lay that out for you clearly below.

In another article back in June about Trump’s G-20 summit with Xi, I described the best-case outcome for that meeting, which has turned out to be the outcome we finally got to this past week:

Here was the best-case scenario: Xi and Trump agree to come out of their meeting sounding like there is hope for a future agreement soon (albeit with nothing specific that has been agreed upon)…. The best hope is they come out with Trump talking (again) like a deal is imminent and, therefore, he’ll hold off on his tariff increases a little longer. The market feels relief and breaks resoundingly through its eighteen-month ceiling…. [but ]Trump will be back to threatening higher tariffs on China.

“Best-Case Scenario Has a Worst-Case Twist“

Watching the endless promised trade deals has been like watching the movie Groundhog Day — same scenario over and over with small variances. Groundhog Day eventually gets somewhere worthwhile. So far, we have not.

By August, I started fuming over how so much reportage talked as though a trade deal was finally falling into place in spite all the times reporters and commentators had been duped before:

I cannot even imagine how anyone thought the US/China Trade War — or, as I call it, the Trump Trade War — was ever coming together. It could not possibly have “fallen out of place,” [as one article claimed] because it has never for one second been in place. It has been astounding to watch how people can month-after-month for over a year continue to chase the belief that the Trump Trade War is starting to fall into place (let alone “has fallen into place”)

… NO progress has been made at any point along the line! So, again, why would anyone think that is going to happen? There has not been one single PERMANENT thing Trump has asked for from China that has been agreed to that we know of. All we have seen are piecemeal temporary measures agreed to that have been poorly followed through. There has never been any reason to believe Trump when he has said a deal was imminent — not any reason based in hard facts.…

The Chinese trade hope is a mirage. We are on the far side of the Gobi Desert from any prospect of “the pieces of the economy falling together.”

“When will we win? Chinese trade victory is a mirage“

A real trade deal is still a mirage. With the election year about to begin, Trump needed to close this out in a hurry. As I have reiterated throughout the past year, the best we could hope for is that Trump would come out with something he could claim is a far bigger victory than it is, and that is where we wound up this past week.

Rabobank is one of several institutions who have examined what little can be known about the present “deal” and is skeptically warning about it in the manner I have been all along:

“We have been promised this gift many times, and each time it has turned out to be an empty box. We need to see China publicly agree too. We need to see the text of what it is agreeing to. And we need to see it signed, sealed, and delivered. However, the optics certainly appear to be that we are closer to a deal than we have been for some time…unless this is Trump conducting public negotiations to then frame China as the bad guy for walking away from his “great deal”, which one cannot rule out. “

Zero Hedge

You cannot rule out a possibility you have seen happen more than once. Given such concerns about what is in what I am naming the “No-Deal Deal,” when Donald Trump said …

… you have to wonder if he meant everything about the story was wrong — even the fact that there is now a deal in place? He did say “completely” wrong. When you start analyzing all the Trump Admin. and China have put out in the past two days, it looks like that is the truth: this is completely a No-Deal Deal in which the US got nothing solid. But it got it just in time for Christmas — just in time to avoid crashing hopes of a “Santa Clause rally” with new tough tariffs — and that is, I think, what matters here — to the stock market and, hence, to Trump and to some extent to the economy. The No-Deal Deal won’t make the moribund economy better, but it will keep Trump from making it worse by having to follow through with his threat of a whole new set of tariffs.

The No-Deal Deal

How appropriate that we have a No-Deal Deal at the same time that we have QE is that is “Not QE.” Such are the times we live in — times of denial, times of pretend.

The basics of the deal, as explained by the administration, are that President Trump caved in on his new tariff threat and tapered back some existing tariffs to give the stock market a bump and take a little pressure off the US economy. On the other side of the deal, Xi’s negotiators agreed vaguely to buy more agricultural goods from the US within constraints of what the market will bear. (Xi has not said for himself whether he agrees.) That last part is a critical caveat in China’s summation of the deal. So, let me lay out, among other things, what the market will bear.

Before I do, I have to note that the deal Trump is now trumpeting about is something we are told we are not allowed to read because purportedly China has stipulated that neither side can release any part of the deal that is actually in writing. We don’t know how much is in writing and how much is just a hand-shake because we are not allowed to see the actual deal, but that probably doesn’t matter because no one has signed on to it yet anyway.

Purportedly, China agrees to buy more pork bellies (literally) and other pork parts, supposedly a lot more, but no one even comes close to agreeing publicly on how much a lot equates to — not even the president and his men. The Chinese love only one thing more than rice and pork and that is soy beans for sauce; so, China agrees to buy more beans, too.

Not only has nothing has been signed, but the governments on both sides have stated Phase One (the No-Deal Deal) never will be signed by either President Trump or President Xi! (Talk about a no-deal deal!)

Since no one can see the deal by agreement with China, no one knows if it’s a real deal or not. That works to Trump’s advantage, should he find as he runs his talking points up the flag pole, that his base doesn’t like what they are hearing. He can, then, claim there is much more to this deal than what he has said so far, or he can claim China reneged so the deal is off. Who will be the wiser, except China, since we have no proof of anything they could have reneged on; but who among Trump’s supporters is going to believe anything China says? So, Trump doesn’t have to worry about that. He can just say it was an outstanding deal for both nations, but China failed to follow through.

In exchange for the Chinese giving themselves a heaping helping of much needed pork for their bellies by taking their own tariffs off pork so their peasants can afford to eat in order to prevent a revolt, Trump has backed down completely on the threat of new tariffs on Chinese goods that Americans would pay. Those were to go in place on Sunday, December 15th. He has also, according to himself, agreed to cut the tariffs that were recently put in place in September in half from 15% to 7.5%.

So, basically, Trump backed down on existing tariffs that were clubbing his economy and eliminated completely the new tariff threat that he was afraid would kill the economy in order to sell pork and beans to China. That appears to be about all he will actually get from China, as everything else is even more vague. That means we really got nothing because China was buying shiploads of pork and beans before the Trump Trade War, and China has not committed to any specific quantities in this deal.

You see, another no-deal part of all of this (besides the total lack of signing at this point and permanent lack of visibility) is that China has reported that it has not agreed in any of this to how much of any US products they will buy. (Even Trump & Co. have a fair amount of daylight between their stories as to how much China has committed to buy.) Here is China’s statement as passed along by Bloomberg,

China will increase imports from the U.S. and other countries, Vice Commerce Minister Wang Shouwen said at a briefing in Beijing Friday. Vice Chairman of the National Reform and Development Commission Ning Jizhe added that the specifics of agricultural purchases would be released later, as the text of the agreement is still under review.

Bloomberg

Since the deal is still “under review” by China, no deal has actually been agreed to, which is why I say the No-Deal Deal is not a done deal. It is also oddly a deal that the deal makers apparently don’t want to talk about to anyone who asks tough questions:

Why so much mystery swirling around the announcement of an actual deal? I suspect it is because the devil is in the details, so those are being kept under tight wrap. And suspect is all anyone can do, given the intentional shroud of mystery.

For example, according to the US government, the deal requires structural reforms from China, but the official pat-ourselves-on-the-back announcement of the deal issued by the Office of the United States Trade Representative says nothing about what those reforms are or how they will be enforced. Maybe those things are stated in the invisible No-Deal as vaguely as “structural reforms.” No one knows, except the great no-deal makers.

The genius of the No-Deal is that no one gets to see it. China supposedly insisted on this, but I think both sides wanted that so they can make of this pact whatever they want to make of it with their own public. What we the public get, instead of the text of an actual deal, is the following official statement by the officials patting themselves on the back for a great deal:

The official announcement of the No-Deal Deal lets us know in the congratulatory words of the lead wheeler dealers, Robert Lighthizer and Steven Mnuchin, that, thanks to the great leadership of President Trump, the deal of the century has finally been struck. That is exactly the kind of Phase-One-Praise-One deal (praise the Donald Deal) I’ve said all year was most likely — something vague that both sides can go home and brag about that doesn’t leave anything better economically in any specific way than it was before the trade war began.

With a real deal (one that is writing), businesses can make plans because they know the lay of the land; but how do you make business plans with China or within China where the facts of the business environment are classified information? (Yes, actually “classified,” according to the Trump administration.) If you’re a soybean farmer, are you going to plant more soybeans now that we have an unsigned agreement no one can read? I don’t think so.

Actually, it appears the No-Deal Deal, from what Trump and his government have generally said about it, leaves us worse off than we were before the Trump Trade Wars began because it leaves most tariffs in place! In exchange for taking a little tariff pressure off, we get vague assurances like “structural reforms” and “substantial additional purchases.”

Those are the same kinds of waffle words we’ve heard throughout the trade talks that each and every time left room for broad interpretation and, therefore, later disagreement by both sides about exactly what had been agreed to. Thus, China might buy more pork and beans than it used to before the war, or maybe it won’t.

President Trump’s expressed understanding is that China will be leaping from its original peak pork-and-beans level of about $24 billion worth of agricultural purchases up to $50 billion, but China’s own statement essentially said, “We’ll do the best we can based on market needs.” That leaves a Pacific-sized expanse between what China claims and what the Trump Admin. claims:

Donald Trump says China will spend $50 billion a year for U.S. farm products as part of a “phase one” trade deal between the countries. But doubts are surfacing whether that’s even possible, bolstered by China’s reluctance to confirm the figure….

Doing so would require a huge jump in China’s imports, potentially stretching its capacity to absorb the products. Trump’s trade representative, Robert Lighthizer, laid out some numbers to reporters, but declined to get very specific. Meanwhile, Chinese officials repeatedly didn’t answer questions on the exact size of their commitment in a briefing Friday….

The $50 billion figure offers Trump an attention-grabbing number to drive up enthusiasm for the deal in rural America. That’s a key political constituency for the president as he campaigns for re-election. It also helps him to defend a partial deal that leaves out many of the objectives he set when he initially launched the trade dispute….

Chinese officials said their imports would increase by “a notable margin,” but refused to be more specific…. Lighthizer suggested that the higher figure is aspirational. He told reporters Friday that China has agreed to raise its annual purchases of U.S. agricultural goods to $40 billion annually for the next two years and make its best efforts to reach $45 billion per year. Beijing agreed to specific benchmarks for individual commodities but those will be classified, he added. 

Bloomberg

As I noted, there is daylight between the president and his men, as has so often been the case with anything Trump says. On China’s side of the story, “a notable margin” may simply mean China will bring Ag. purchases back up to where they were before the Trump Trade War. As you can see, a return to what already existed (first bar on the left) would be a “notable margin” of improvement from where we are now:

Yet, it would be no gain at all from the trade war.

In fact, can anyone seriously believe China will more than double the pre-war figure when it took them more than a decade during their best years to get to that level, much less that they will double that record in one year: (2012 being China’s record year for Ag. imports from the US.)

It’s not even remotely doable.

Finally, Trump’s braggadocio of $50 billion is given away as pure bluster by one simple fact: $50 billion is more than the U.S. exports in corn, soy, beef and pork to all the nations in the world. Looking at this promise from the US side, then, how are we even going to come up with that much in agricultural goods to export to China? We’d have to double our total exports of the things China buys in one year from the amount we sold at our own peak production. China cannot agree to buy something the US doesn’t even have to sell, and our production dropped a lot this year due to weather:

It sounds like the main export here is baloney. Why do “specific benchmarks” need to be classified? The purchase quantity of soy beans hardly seems like something that needs to become a government secret. I say the quantities need to be classified because the deal is not yet a deal and to create ample wiggle room for both sides. China doesn’t want to be held accountable if real numbers are never met, and Trump needs bigger numbers to brag about than China will agree to. Hence, vague quantities like “increase by a notable margin.”

What does China likely mean by saying in its own summations of the deal that it will buy only what the market will support? Consider this: if China agrees to buy more product than the US exports to all the nations on earth, as Trump claims it has agreed to do, it is also agreeing to pay astronomical prices from here on out. Simple economic math tells you that, if one nation buys up everything it has bought before the trade war plus everything every other nation has bought while every other nation continuers to buy what it has been buying, then prices are going through the roof because everyone is competing for more product from that one supplier than the supplier has to sell. That’s a massive global bidding war! The math tells you the US side is talking nonsense.

China also has to look at how much it can actually consume in determining what the market will support (which is why quotas are dumb way to go about anything in trade). As Bloomberg also notes…

Soybeans have been the main U.S. export to China…. A large part of the imports have been used in the past to feed China’s pig herds. Now, though, the pig population has been devastated by African Swine Fever over the last year, and demand for feed is weakening.

China is not going to sign on to a deal that requires it to import piles of soybeans just so the piles can sit on the docks and rot! Presumably, China, pre-trade-war, purchased all that it needed. So, how is it going to purchase nearly twice as much with fewer pigs to feed unless it plans massive cuts in exports from other nations or plans to cut off all its own soy-bean farmers? That’s the problem with a quota-based system versus free trade, it can lock you into quantities that you cannot even use and force you to drive your own prices sky-high by having to try to purchase more than the market can even produce.

Then think of what that means for US consumers who will have to compete against China for pork and soy as China buys more than it can actually use, sucking all that product out of the US and dumping it in rotting heaps in China. That would be tremendous for US soy farmers, but devastating to US livestock farmers that use large amounts of soya in their feed mixes. It would mean a huge increase in food prices for US consumers, too.

If you think your way through it, you can see the deal as it is claimed on Trump’s side is all typical Trump bluster. No wonder real numbers are being kept classified by mutual agreement so that Trump can say whatever he needs to say for his election and Xi can say whatever he needs to say to prevent a peasant revolt.

China also has to worry a lot about damaging relations it has cultivated with its new alternative suppliers of pork and beans in Brazil if it cuts them off at the knees in order create a way to double its purchases from the US over its past record levels. China knows from all it has witnessed and experienced that Trump may turn in an instant and implement new tariffs against it, even after a trade deals is struck … even for reasons having nothing to do with trade.

China saw what Trump did to Brazil when he blamed Brazil for becoming the next monetary Zimbabwe and, so, put tariffs on their steel and aluminum again. China saw what Trump did with Mexico after a trade deal was agreed to when Mexico didn’t help out enough on immigration. Since Mexico capitulated, Trump backed off. Trump’s interactions with other nations prove he loves to pull the football away at the last second in negotiations, but he also loves to use tariffs as a hammer for issues having nothing to do with trade. Therefore, China knows it cannot risk destroying relations with other nations on an undone, partial deal with the US! In a nation with over 4 billion people, food is constantly the biggest concern, so you must maintain alternate supply lines at all times.

Real deals come with signing ceremonies. They come with texts presented via the press. There has been so no signing ceremony, no text, no contracts signed, so no real deal! What we have is some kind of agreement to reach a deal based on vague terms, which is the same thing we’ve seen every time the parties say a deal is on the table. This is just a fancier version of the same game. That’s why the stock market rose when it first heard of the deal; then it took time to sniff all this out and said, “There isn’t much meat in this deal,” and it fell back to flat.

Likewise Ag. commodities first rose at the announcement, then shrugged it off like a meatless burger as speculators digested the contents:

The sumo wrestlers, Trump and Xi, decide to sit things out for Christmas and to not rush on settling the big stuff next year. Neither one had the belly for more tariffs. The two sides have given themselves the truce they needed to avoid making things worse. That’s all. The threat of escalation has abated so long as Trump doesn’t pull another Lucy and yank the ball away from Chinese Charlie one more time.

In a nutshell, Trump kicked the can further down the road to get around Christmas and the upcoming election year, and we ended in a stalemate as the best we get after two years of expensive trade war. I think the No-Deal Deal is the most we’ll likely ever get since Trump has said he doesn’t anticipate making any more deals with China until after the election, and we don’t know if Trump will even be president after the election. China certainly won’t negotiate with him and give him anything if he is a lame duck.

What all the president’s men are saying

Trump is already calling this a “great deal” to try talk the market up as usual, but it didn’t get the market up much so far. Perhaps the market is finally getting as doubtful, instead of hopeful, as it should have been long ago. (Or maybe another day’s coaxing will do the job.) I’m sure it is a great deal to Trump because he’s relieved he doesn’t have to implement the new tariffs he threatened in the middle of the peak Christmas shopping season and just before the traditional Santa Clause rally. (That may be enough to help the market out.)

It’s also a great deal to Trump because it gives him something with which to wash off the impeachment pie congress threw up in his face on Friday when the House Justice Committee voted on what they saw as Trump’s just dessert. Trump was able to take some attention off the impeachment on his face by serving the public mince-meat pie made with pork.

It’s a great deal to Trump because he can now make what he wants of it throughout the upcoming election year.

It’s terrific. Take it from the presidential mouthpiece, “We are there now!”

Look at Larry waffle when he is questioned about his claim that “Phase One” (a.k.a. the No-Deal Deal) includes assurances that intellectual property will not be stolen. At first, he indicated Phase One lays out that Phase Two will seek to resolve those issues. Later he talks as if Phase One resolves all of that within Phase One. When questioned because of his weaselly shift about whether or not all the intellectual property stuff still needs to be hammered out in Phase Two, he tries to slip away by saying, “That’s a better question for Robert Lighthizer.”

Well, of course it is, because I suspect Larry was being Larry and saying things in more ebullient, cracked-up terms than justified when the truth (if we could actually see the classified No-Deal Deal) is that the only statements about those things under Phase One are that China will continue to negotiate to resolve them satisfactory to the US in Phase Two (the part that will probably never happen and certainly will not happen until after the 2020 election … and then only if Trump gets re-elected).

The best we get from Larry when the hosts try to pin him down on those issues is “my sense is that some of that will get dealt with in Phase One. My hunch is more will spill over into Phase Two.” (Emphasis Larry’s.) Yeah, a lot more as in everything that is substantive and specific enough to be enforced. But, hey, we’re going to start talking about Phase Two “right away.” So, we have an agreement to talk about those things.

Notice, also, that when Larry talks about China’s supposed agreement to buy $40-50 billion in US Ag. goods, he talks about it being “doable.” Now, in my mind, “doable” doesn’t sound like “done deal.” Larry is only willing to say he thinks the Chinese can find a way to live up to that. Still, he gives no specifics as to how it would possibly be “doable,” given the market constraints I fully noted above. Hence, Larry wants to “just stay qualitative,” he says, rather than quantitative since all of this is only vaguely doable at best. So, let’s talk about the general qualities of the deal and not hard numbers.

Larry cannot even say when we will actually get a Phase Two deal when asked if it can happen before the election, so he says “Look, Phase Two begins immediately.” No it doesn’t! Talk about it begins immediately. So what? We’ve been talking about all of this stuff for two years! But Larry wants to make it sound as though Phase Two starts right away just because we’ll start negotiating it immediately. Larry should open a Waffle House.

Larry even seems to say that the $40-50 billion in Ag. will accumulate over the course two years. Unless he means it will take two years for China to get up to the level where it is purchasing that much every year, this trade deal is WORSE than where we started. If he means we are talking about getting $40-50 billion over the course of two years, that is less per year than we had before the Trump Trade Wars began! We’ve gone backward! That would make this the biggest nothing burger in trade history; but all the intentional vagary makes his meaning unclear.

Confirming what Bloomberg noted above, even when Phase One actually does become a signed deal (a done deal), it will never be signed by the presidents of both countries according to Laughable Larry. It will be signed by the chief negotiators, presumably in January. That will leave Trump plenty of room in the months ahead to say he never agreed to any of it if he needs to. We’ve seen him do that many times after his negotiators say certain terms are accepted. It will leave Xi the same room. If that were not the purpose, why not have the heads of state sign off on it? What kind of deal stinks so bad that neither president will touch it with a pen? Why not also get Phase One ratified by congress like the America-Mexico-Canada agreement and by the full National People’s Congress to lock it in? That’s when it actually becomes a “done deal.”

The talk about town

I find it interesting that the followup video commentary with Lunatic Larry’s friend and budget co-conspirator at the White House, Ron (Insane) Insana, which was posted along with the above video, has Ron claiming Trump’s most hawkish China trade advisor, Peter Navarro, “was the loser here.”

In case you’re confused about whether two years of trade war have delivered us a big nothing burger, you have Crazy Cramer for company, who parody’s Trump by calling this the “art of the non-deal” so far:

Bottom line: Everyone is confused, and there is a lot of speculation (even on my part) because no details are provided and the White House people speaking to the press do not even fully agree or even seem to make clear sense in what they say. We get their “hunches” and their “sense” about what it will mean. The Trump White House (or any White House) deserves criticism and speculation when it makes hyuge proclamations of a grand bargain but classifies all the details and can’t even say cogently and consistently what it means.

As further evidence that everything China has now supposedly agreed to is the ultimate nothing burger, Lance Roberts wrote back in September, that China had already agreed to everything that is supposedly now in the No-Deal Deal:

China knows that Trump needs a way out of the “trade war” he started, but that he needs a something that he can “boast” as a victory to a largely economically ignorant voter base. Here is how a “trade deal” could get done. Understanding that China has already agreed to 80% of demands for a trade deal, such as buying U.S. goods, opening markets to U.S. investors, and making policy improvements in certain areas, Trump could conclude that “deal” at the October meeting.

Real Investment Advice

This week, Roberts followed up on that by noting,

What is missing from the agreement was the most critical 20%: Cutting the share of the [Chinese] state in the overall economy from 38% to 20%, Implementing an enforcement check mechanism; and, Technology transfer protections….

This is NOT a “Phase One” trade-deal. This is a “Let’s get a deal on the easy stuff, call it a win, and go home,” deal.

◄ “The Art Of The Deal” & How To Lose A “Trade War”

Bottom line: Trump bet that his trumped-up tariffs scheduled for December would push China to a better deal than what he already had in hand, but they didn’t. Xi didn’t flinch and called his bluff. There will be no talk by Trump, of course, about this being the end deal. He will keep playing out the hope of a greater victory throughout his newly extended “after the 2020 election” timeline; but this is the deal I said all year Trump would end up with — one that is vague enough that he can make of it what he will for bragging rights. Not even being visible, it turned out even more vague and flexible to Trump’s needs of the day than I anticipated.

This was not a trade treaty, nor a surrender by either side; it was a ceasefire. But some ceasefires, like the one that exists in Korea, stay suspended in unresolved political conflict accompanied by threats for decades. Phase One is the equivalent of the Korean Demilitarized Zone — an armistice we can scrap over with tariffs for years at great expense to both sides that never goes away. The expense in this case is that existing tariffs continue to drag as a cost on the economy for an indefinite time to come. Only, at this point, the armistice hasn’t even been signed by either side, so both sides can easily walk away from the No-Deal Deal, which could put tariffs right back up.

The stock market may relax over the lack of immediate tariff increases, as Trump hopes it will in time for Christmas, but all the recessionary pressure of the Trump Tariffs continues for months to come.

And now proof that Xi JinPing’s face can only be improved by a caricature: