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May 8, 2019

Finance | Analysis | The Finance 202: U.S.-China trade deal hits speed bumps

By Tory Newmyer



THE TICKER

In this file photo taken on February 22, President Trump watches as China's Vice Premier Liu He speaks with U.S. Trade Representative Robert Lighthizer (Mandel Ngan / AFP)
Don’t expect a quick resolution of the trade standoff between the United States and China. 
That warning, from a source close to the administration, comes as a delegation of Chinese negotiators arrives in Washington to continue talks toward a deal — and as the Trump administration sets a hair trigger on a major tariff escalation set to fire at the stroke of midnight Friday.
But an agreement that seemed close at hand as recently as last week now looks like it will be significantly tougher to forge, at least in the immediate term.
Trump administration officials blame the Chinese for walking away from their commitment to enshrine structural changes in their law. Reuters reports that last Friday, Chinese negotiators submitted a raft of edits to a draft agreement that reversed pledges to make legal changes on core American demands, including "theft of U.S. intellectual property and trade secrets; forced technology transfers; competition policy; access to financial services; and currency manipulation." That appears to have placed considerable distance between the two sides.
“I would look at this week as a check-the-box meeting,” one source tells me of this week's negotiations. “The Chinese are going to show up and focus more on press statements than what’s accomplished at the table. And things will play out over the next couple of weeks.”
On top of the disagreement over the legal status of Chinese concessions, the Wall Street Journal’s Chao Deng and Lingling Wei report, the two sides remain at odds over “China’s subsides to domestic companies and opening key Chinese markets, such as cloud computing,” among other issues.
And the U.S. Chamber of Commerce last week lowered expectations for the agreement by casting doubt on whether the Trump team can make breakthroughs on two key fronts — Chinese cybertheft and the subsidies that Beijing uses to prop up favored industries.
“I'm not sure we're going to get all the progress we want,” Myron Brilliant, the group's executive vice president, told reporters on a conference call. 

Members of U.S. and China delegation led by Chinese Vice Premier Liu He, Mnuchin and Lighthizer, stand for a group photo session in Beijing last week. (AP Photo/Andy Wong)
Flash points aside, China critics see a familiar pattern emerging: That is, that the Chinese never intended to finalize a deal but rather play for time. “I don’t think the Chinese are negotiating in good faith,” says Peter Morici, an economist and professor emeritus at the University of Maryland. “We could have an agreement in a week if they would. But [Chinese President] Xi [Jinping] has his own internal pressures. He’s feeling pressure at home, so he’s starting to back away.”
One potentially encouraging signal from across the Pacific: Beijing is still sending Chinese Vice Premier Liu He, its top negotiator, to Washington this week, a move in doubt after President Trump’s Sunday tweets threatening to massively dial up tariffs.
“To me, the fact that the Chinese are still coming with Liu He at the head means there’s some possibility they could have a marathon session on Thursday, break through whatever these problems are and get themselves somewhere," says Claire Reade, senior counsel at Arnold & Porter in Washington and a former assistant U.S. trade representative for China.
Reade presented the bull case for the recent Chinese balk, floating the possibility it represented “one last concession to the hawk side in China” to gauge the U.S. reaction. “It seems conceivable that the Chinese didn’t expect the U.S. to respond with such vehemence. Sometimes the Chinese need to demonstrate to their own constituencies that certain positions aren’t viable.” 
A former State Department official says the Trump team is guilty of its own miscalculations about the Chinese. Brian Klein, who was posted in Beijing, said the administration is assuming too much about the impact of tariffs on the Chinese economy and Xi’s appetite for a deal, per my colleagues David Nakamura and Ashley Parker. “There’s little sign that the Chinese economy is being dramatically damaged,” Klein, who operates Decision Analytics, a New York-based risk management consulting firm, tells them.
Where would that leave the two sides as they prepare to reconvene this week? “We really don’t know, and what will be revealing is what happens on Thursday.”
You are reading The Finance 202, our must-read tipsheet on where Wall Street meets Washington.
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TRUMP TRACKER
TRADE FLY-AROUND: 

Trump and First lady Melania Trump, left, smile during a one year anniversary event for her Be Best initiative in the Rose Garden on Tuesday. (AP Photo/Andrew Harnik)
Trump trade moves could threaten his reelection. The Post's Toluse Olorunnipa and Seung Min Kim: "As Trump prepares to run on the economy, his threat to increase tariffs on imports from China has sent the stock market diving and undercut a stretch of positive economic news. U.S. farmers and exporters, already bearing the brunt of China’s retaliatory tariffs, now face the prospect of an escalated trade war in which states that Trump needs to win reelection will be in the crosshairs.
"The trade war has also exposed a rift inside the White House and among the president’s allies — with some officials pushing for a quick resolution to calm the markets ahead of 2020, and others warning the president that a weak deal with China could leave him politically vulnerable."
Treasury Secretary Steven Mnuchin and top economic advisor Larry Kudlow are urging a swift resolution to avoid 2020 blowback, Toluse and Seung Min report.
Companies scramble to prepare for new tariffs. Politico's Doug Palmer and Adam Behsudi: "U.S. companies are bracing for a huge jump in costs as tariffs on $200 billion worth of consumer products and other goods from China are set to more than double on Friday per [Trump’s] orders... The second, $200 billion list includes many consumer goods. They range from low-value items like dog leashes, toothbrushes and toilet paper to pricier goods like barbecue grills, vacuum cleaners, freezers, refrigerators and furniture... Most manufacturers, suppliers and business groups are warning that it is their members, and their American customers, who will shoulder the brunt of the tariffs.
Dimon: 80 percent chance of a deal, eventually. Bloomberg's Sam Mamudi and Stephen Engle report the JPMorgan Chase CEO predicts "it remains probable there will eventually be an agreement. He said, however, that global growth would be hit if the talks go 'really south.' 'Now we have this whole kind of little bump in the road,' said Dimon. 'Sometimes his tweets don’t pan out to be as bad. I don’t think they’ll get the deal done by Friday.'"
— You say tomato and I say ta-riff? Starting on Tuesday, the United States imposed a 17.5 percent tariff on Mexican tomato imports. My colleague Laura Reiley reports “economists say that could lead to shortages and price increases of up to 85 percent as soon as this winter.” The tariff follows the demise of a 22-year-old agreement that sought to “maintain the peace between American and Mexican tomato growers.”

Despite calls to lift the taxes, the president continues to say they are working.
Heather Long
— Trump lost more than $1 billion between 1985 and 1994. The New York Times investigative team that brought you the Pulitzer-prize winning blockbuster about Trump’s tax avoidance schemes last year dropped another bombshell Tuesday night.
The paper obtained printouts of Trump’s IRS tax transcripts that show he was hardly the profit-minting business whiz he presented to the public: “The numbers show that in 1985, Mr. Trump reported losses of $46.1 million from his core businesses — largely casinos, hotels and retail space in apartment buildings. They continued to lose money every year, totaling $1.17 billion in losses for the decade.”
This detail in particular lit up Twitter. Look for it to reappear on the Democratic presidential campaign trail: “In fact, year after year, Mr. Trump appears to have lost more money than nearly any other individual American taxpayer, The Times found when it compared his results with detailed information the I.R.S. compiles on an annual sampling of high-income earners. His core business losses in 1990 and 1991 — more than $250 million each year — were more than double those of the nearest taxpayers in the I.R.S. information for those years.”
Trump, predictably, responded on Twitter this morning:
Real estate developers in the 1980’s & 1990’s, more than 30 years ago, were entitled to massive write offs and depreciation which would, if one was actively building, show losses and tax losses in almost all cases. Much was non monetary. Sometimes considered “tax shelter,” ......
— Donald J. Trump (@realDonaldTrump) May 8, 2019
....you would get it by building, or even buying. You always wanted to show losses for tax purposes....almost all real estate developers did - and often re-negotiate with banks, it was sport. Additionally, the very old information put out is a highly inaccurate Fake News hit job!
— Donald J. Trump (@realDonaldTrump) May 8, 2019
Mnuchin addresses Trump fundraiser. The Post's Michelle Ye Hee Lee, Josh Dawsey and Damian Paletta: "Mnuchin addressed a group of top donors backing [Trump’s] reelection Tuesday evening, making an unusual political appearance at a gathering that included industry executives his agency is tasked with regulating. Mnuchin’s attendance at the kickoff event for the Trump Victory Committee came a day after he rejected a request from House Democrats for Trump’s tax returns...
"Among those who were invited was Trump friend and billionaire Stephen Schwarzman, chief executive of the private equity giant Blackstone Group, who did not attend, according to a person familiar with the invitation. Treasury secretaries in recent years have avoided attending fundraiser events with people they could be tasked with regulating, in part because of their unique role in overseeing a broad swath of companies in the financial system."
MARKET MOVERS
Stocks tank. A day after investors largely shrugged at mounting trade tensions between the U.S. and China, stocks registered a delayed reaction Tuesday, with the S&P 500 shedding 1.65 percent. The Post's Thomas Heath: "The sell-off was broad and deep, reaching into technology, chips, industrials and materials. The Dow Jones industrial average plunged 473 points, about 1.8 percent, to close at 25,965. The blue chip measure was down 648 points at its low. All 30 Dow components were in the red, with aerospace giant Boeing the biggest drag after a downgrade by Barclays...
"The Cboe Volatility Index (VIX), known as the 'fear gauge,' rose to its highest point since January, a sign that Wall Street is throwing a mini-tantrum over Trump’s trade policies."
By one measure, the route was worse than the Christmas Eve selloff that nearly pitched stocks into a bear market. Bloomberg's Elena Popina: "It’s not the size of the decline but the speed with which investors are hitting sell buttons. At one point today some 89 percent of stocks on the New York Stock Exchange traded in the red, surpassing the threshold reached Dec. 24, when a 2.7 percent rout in the S&P 500 pushed the gauge to a 20-month low. During the December correction, the volume of stocks trading down was higher just on one other day, Dec. 4."
Clarida: No rate cuts coming. Bloomberg's Christopher Condon and Rich Miller: "Federal Reserve Vice Chairman Richard Clarida pushed back against speculation in financial markets the central bank will cut interest rates to boost softening inflation up to its 2 percent target. 'I don’t think we’re at that place now,' Clarida said Tuesday in an interview with Bloomberg Television...
"His remarks were later backed up by comments from Fed Governor Randal Quarles, who played down concern over weak inflation. Clarida also echoed Fed Chairman Jerome Powell’s take that transitory factors had contributed to the most recent dip in inflation, and declared the U.S. economy and monetary policy were in 'a good place.'”
POCKET CHANGE

Uber headquarters in San Francisco. (AP Photo/Eric Risberg)
— Uber and Lyft drivers plan protest for today: “Getting an Uber or a Lyft may be impossible — or take longer and cost more — Wednesday when drivers for both companies plan to strike in major U.S. cities to protest what they say are unfair wages and poor working conditions,” my colleague Luz Lazo reports. “Thousands of drivers in at least eight cities — including Los Angeles, New York and Washington — are planning to shut off their apps and join rallies outside company headquarters and regional offices, according to labor organizers.” The protests occur just days before Uber’s initial public offering, which CNBC’s Lauren Feiner writes “is expected to be the largest among new tech stock debuts this year with an expected valuation of $80.53 billion to $91.51 billion on a fully diluted basis.”
News you can use: Luz reports that in the DMV, “officials said they were working with taxi dispatch teams at Reagan National and Dulles International airports to ensure that extra taxis were available in the event of increased demand Wednesday.”
Lyft, whose IPO was just weeks ago, reported “strong revenue growth but substantial losses in its first quarterly earnings report since its rocky stock market debut,” the Associated Press's Cathy Bussewitz wrote last night.
Speaking of Uber, the Wall Street Journal's Julie Jargon has a fascinating story on ride-hailing apps that are appealing to working parents by marketing themselves as a way to ferry kids between school, extracurriculars and back home. Uber and Lyft technically have policies against allowing unaccompanied minors to use the apps, but some parents told Jargon that their kids do so without difficulty.
  • One app the Journal reported on is HopSkipDrive, which requires all drivers to have five years of child-care experience and undergo background checks, and is targeted to young riders 6 and up.
It’s by now a dated joke to say an app is Uber but for …, yet there appears to be genuine interest in this type of service. The obvious concern is safety and security. Uber itself tested a program for minor riders in three cities in 2017 but declined to tell the Journal if it will roll out a larger program.

A charter plane carrying 143 people and traveling from Cuba to north Florida sits in a river at the end of a runway, Saturday, May 4, 2019 in Jacksonville, Fla. The Boeing 737 arriving at Naval Air Station Jacksonville from Naval Station Guantanamo Bay, Cuba, with 136 passengers and seven aircrew slid off the runway Friday night into the St. Johns River. (AP Photo/Gary McCullough)
— Boeing continues to get hammered. Boeing stock continued to fall Tuesday, Bloomberg News’s Ryan Vlastelica reports, “after Barclays Capital downgraded the stock, writing that Wall Street was still underestimating the fallout that would occur as a result of the deadly 737 Max crashes in Indonesia and Ethiopia.” ‘We expect the recovery of 737 Max production to take longer than expected,’ and fliers’ desire to avoid the aircraft is “likely worse than anticipated,’ analyst David Strauss wrote, lowering his investment rating to equal weight from overweight. The price target fell to $367 from $417.” It might not be over yet: There’s another hearing on the Hill today about 737 Max, featuring testimony from the FAA and NTSB heads.
MONEY ON THE HILL

DCCC Chair Cheri Bustos (D-Ill.) (Photo by Melina Mara/The Washington Post)
— Corporate PACs and lobbyist find a new (old) home for their campaign dollars: Cast out by many in the sprawling Democratic presidential campaign, corporate PACs and registered lobbyists are flocking to the newly empowered House Democrats’ campaign arm as a way to continue to flex their financial muscle, the Daily Beast’s Jackie Kucinich and Lachlan Markay report. The DCCC “raised about $1.93 million from 143 corporate political action committees in the first quarter of 2019, according to a Daily Beast review of campaign finance records.” Kucinich and Markay report that is a substantial increase from previous election cycles. “In the first quarter of 2017, for example, 103 such PACs donated $1.32 million to the DCCC. Two years earlier, 101 of them gave $1.15 million to the committee.”
In terms of lobbyists, the pair report that “in the first three months of the year, eight registered federal lobbyists “bundled” more than $1.2 million in contributions for the committee. That’s nearly double the total during the same period last cycle, and nearly 40 times the DCCC’s lobbyist bundling haul during the entire first half of 2015.”
Remember: My colleague James Hohmann scooped in The Daily 202 last week that the U.S. Chamber of Commerce wants to do more to attract Democrats. That news comes as the Koch network is also sought to strike a more bipartisan tone. Together, the evidence is clear that the broader Washington ecosystem is taking notice of the first Democratic House majority since 2010. The question now is how much the base will tolerate.
THE REGULATORS

The debt collection industry has been clamoring for an update to the Fair Debt Collection Practices Act for years, but the CFPB proposal announced Tuesday is likely to meet resistance from consumer advocates.
Renae Merle
DAYBOOK
Today
  • The House Transportation & Infrastructure Subcommittee on Aviation holds a hearing on the status of Boeing’s 737 Max.
  • The House Financial Services Subcommittee on Housing, Community Development and Insurance holds a hearing on the “state and barriers to minority homeownership."
  • The Brookings Institution hosts an event to explore “how policy can help reduce housing stress on the middle class."
  • The Center for Strategic and International Studies holds a discussion with Rep. Early Blumenauer (D-Ore.) on trade.
Coming Up
  • Ways & Means holds a hearing “Understanding the Tax Gap and Taxpayer Noncompliance” on Thursday.
  • The National Economists Club holds an event with former Federal Housing Finance Agency official Nayantara Hensel on Thursday.

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