Trump on China: "You’d save $500 billion if you cut off the whole relationship"

Hi everyone, I wanted to send out my thoughts on President’s Trump comments this morning about the US-China relationship. I will follow up later with a normal newsletter.

Several of you wrote to me yesterday that you thought I was being overly pessimistic about the prospects for the US-China trade deal, and that more likely President Trump is putting on a show but has no intention of actually pulling the trigger.

That is certainly possible, and has been done before.

This morning he ramped up the show, if that is what it is, during an appearance on Fox Business News, in which he said:

"There are many things we could do..We could cut off the whole relationship."…

"Now, if you did, what would happen?…You’d save $500 billion if you cut off the whole relationship."…

When asked about his relationship with Xi Jinping, he said he has a very good relationship” but "right now I just don't want to speak to him.”

The official Chinese readout from last week’s call between the top trade deal negotiators included this language:

create a favorable atmosphere and conditions for the implementation of the China-U.S. phase-one trade deal, and strive for positive outcomes. 努力为中美第一阶段经贸协议的落实创造有利氛围和条件,推动取得积极成效

That language was not in the official US readout, as I discussed in Monday’s newsletter.

The “create a favorable atmosphere” is an equivocation the size of a Long March Rocket, and if anything the “favorable atmosphere” is even worse this week than it was last week. This threat today in the Global Times will not help -At least four GOP lawmakers, two US entities to be put on China’s sanction list over COVID-19 lawsuits: analysts:

China is extremely dissatisfied with the abuse of litigation by the US against China over the COVID-19 epidemic and mulling punitive countermeasures against US individuals, entities and state officials such as Missouri's attorney general Eric Schmitt, who filed lawsuits against China to seek damages over the coronavirus pandemic, sources close to the matter told the Global Times exclusively. At least four US Congress lawmakers and two entities will be put onto China’s sanction list, according to analysts.

"We must resolutely crack down on those politicians who, for no reason, undermine China-US ties for their own political benefits. For those who promote anti-China legislation, we need to find out what the business ties are between those officials or their families with China," Yuan Zheng, a research fellow at the Chinese Academy of Social Sciences (CASS), told the Global Times on Wednesday. 

"We can't just strike back symbolically, but should impose countermeasures that could make them feel the pain," Yuan said…

China was the third-largest export destination for Missouri, after the UK and Canada, for goods and services in 2019 worth $1.1 billion and $775 million, respectively. Some of the top goods exported to China included oilseeds and grains, meat products, and medicine. ..

Some Missouri companies, for example, have long-term investments in China and are likely to feel severe consequences if China strikes back with punitive measures in response to the coronavirus lawsuit. Emerson Electric, which was founded in Missouri, has significant operations in China, and just opened its largest overseas research and development center in Suzhou, East China’s Jiangsu Province in 2019

The politics on the trade deal have shifted significantly in the US since the agreement was signed in January. The human and economic carnage from the pandemic has made it look increasingly likely that the best pathway for Trump to win re-election in November is to “blame China”, not just in rhetoric but in action. And the weak phase one trade deal, in spite of its benefits for some key Trump supporters, does not look nearly good enough now to help in November. What we may be watching is the convergence of the more hawkish national security stream with the domestic political stream that now sees more value in blowing up the trade deal than keeping it.

What might happen if the President decides to blow up the trade deal?

In many ways Trump is the ballast keeping those more hardline national security policies from moving forward, all because he has wanted to make the trade deal. If he now abandons that goal, do not be surprised to see movement around areas Beijing is going to get really upset about, like Magnitsky Act sanctions and Taiwan, as well as further efforts in the financial and technology sectors. So we would probably end with a trade war, tech war, information war, financial war and, best case in this scenario, cold war.

Is that the likely outcome? I am not going to predict that it is, but the odds of a sharp and significant increasing downward slope in the trajectory of US-China relations looks even more likely.

Thanks for reading, and look for another newsletter later today.