Trump is Following His Predictably Volatile Pattern of Negotiation With China – But Markets Remain Jittery

On Monday of this week, US markets rallied on the news that after a meeting between Donald Trump and Chinese President Xi Jinping, a pause in the trade war had been agreed and that a final deal seemed not only likely but virtually guaranteed. Then on Tuesday, Trump offered a series of somewhat contradictory Tweets in which he praised his relationship with Xi but also threatened a deluge of more tariffs if an agreement with Beijing cannot be made in less than 90 days. In a further jolt to investor confident in the US, Trump gave himself the dystopian anti-hero title “tariff man”. This was not something that market watchers wanted to hear and as a result, the Dow plunged nearly 800 points.

To understand Trump’s seemingly contradictory Tweets, one must reexamine something written in Eurasia Future dating back to June of this year. At the time I identified Trump’s pattern of negotiation in the following way:

1. Make unreasonable demands

2. Follow the unreasonable demands with extraordinary and often blood curdling threats

3. Just when you think things can’t get worse – make even more unreasonable demands followed by even more extraordinary threats

4. Say that dialogue is an option but that if it fails the threats will be executed

5. Dramatically close the door on dialogue

6. Engage in dialogue and reach a compromise that should have been reached in the first place under more adult conditions – even though by now most members of the public and some politicians have forgotten the original threats because of Trump’s personal ability to go from a raging bully to a pleasant host – a kind of unpolished version of Ronald Reagan.

At the time the aforementioned six steps were written, Trump had just declared new anti-China tariffs worth $200 billion and consequently I stated that the trade war was somewhere between steps 2 and 3. By contrast, Trump’s Monday Twitter tirade was clearly in the midst of step 4 – that uncomfortable area where one does not know if one is yet out of the woods in terms of a new Trump threat or whether the bluffing has begun and the bonhomie will soon break out. Within this framework, step 5 is optional but it is an option Trump has taken more than once in the context of other high level international negotiations.

Indeed, Trump uses this strategy not only in trade wars, as the US President’s dramatic cancellation of his first planned meeting with Kim Jong-un can attest to. Likewise, the fact that the historic meeting with Kim was then re-scheduled shortly thereafter, is a further sign that step 5 can give way to step 6 rather quickly in many instances.

Later on Monday, Trump returned to China after a Twitter attack on French President Macron’s fuel tax. Trump issued the fellow statements after stocks began tumbling in the US:

While reiterating the “all or nothing” zero-sum mentality that US businesses dislike as much as Chinese ones, Trump failed to mention that not only does China not want tariffs, but most American businesses don’t, most American farmers don’t, most American industrial workers don’t and most American consumers don’t – especially not during the Christmas buying season.

While October’s stock market dips clearly indicated that a change in the trade war was necessary, the more recent news that General Motors is shutting four factories in the US and cutting thousands of jobs in the process, showed beyond any reasonable doubt that the trade war was not protecting the industrial jobs it was supposed to protect. This is the case because companies like General Motors source many of their parts and materials from China, while Chinese buy more of General Motors’ flagship brand Cadillac than do Americans. All the while, the shockwaves of a trade war make companies like General Motors as well as Harley Davidson seek to relocate jobs outside of the US as a specific result of a trade war which makes goods ‘Made in The USA’ more expensive to sell abroad due to the straightforward phenomenon of reciprocal tariffs.

Since stocks and shares react to real time events based on speculation, it is crystal clear that on a Monday when the White House seemed hopeful on a China trade deal whilst interjecting treats into the equation on Tuesday, such conflicting rhetoric resulted in a clear positive to negative response from the markets. While protectionists engage in mental acrobatics and verbal gymnastics to try and explain these trends away, the direct relationship between official and semi-official statements on the trade war with China and the health of US markets is self-evident to anyone willing to look at the situation rationally rather than ideologically.

Returning to the pattern of traditional Trump negotiation strategy, there is a chance that Trump’s confusing Tweets from Tuesday represent a metamorphosis from stage four into stage five but there is always a chance that Trump might more boldly slam the door on negotiations before finally reaching the deal that the wider world including the US private sector wants him to make.

Meanwhile, all China can do is watch and wait as China’s markets continue to open to imports from the wider world while the only thing prohibiting the simplified inflow of US goods to China is the trade war itself. To put it bluntly, China is doing what the US claims it wants China to do and while other nations including America’s European rivals benefit from China’s ever more open economy, American manufactures and farmers are being left out not because of Chinese policies but because of those drafted in Washington. When all is said and done, it does seem as though Trump is preparing for some sort of “mission accomplished” moment in the trade war that will see a level of normalisation in this one specific area of China-US relations (other issues including the South China Sea, India-China relations and the US driven propaganda campaign against Xinjiang province are if anything becoming more intense).

As market analysts continued to negatively speculate on the possibility of a much sought after China-US trade deal in spite of US markets being closed on Wednesday for the funeral of George H.W. Bush, Trump appeared to rush to expedite an embrace of stage 6 of his negotiation strategy, by praising what he described as a high level of both political and personal understanding with Xi Jinping. Clearly, Trump hopes that his more conciliatory tone will positively influence the markets when trading resumes on Thursday morning.

By not only praising progress on trade but also progress in respect of anti-narcotics cooperation, Trump has gone from threatening to put a kibosh on the good will established at his meeting with Xi in Argentina to now praising China-US cooperation on multiple fronts. As such, Trump’s attempts to inspire confidence in US stocks and shares could scarcely be clearer.

That being said, until such a final settlement is reached, Trump’s rhetoric and that of his White House colleagues will continua to push and pull the US markets in every direction imaginable. Because of this, market watches ought to look as Trump’s Twitter profile as a kind of chaotic zoo full of every species of bulls and bears known to mankind. Such is the nature of Trump’s volatile negotiating strategy. China is well prepared for this, but this is not necessarily the case in respect of the Dow Jones, S & P 500 and Nasdaq.

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