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Wall Street started off the second half of 2019 with a bang, as worries about an escalation of the U.S.-China trade war receded following the meeting between President Donald Trump and his Chinese counterpart Xi Jinping at the G-20 summit, where Trump pledged to hold off on levying 25 percent tariffs on a final tranche of $300 billion in Chinese exports to the U.S.
The weekend meeting between the two leaders was sparse on details, but it was enough for investors to breathe a sigh of relief, sending the Dow Jones up around 150 points by midday Monday. “Before the meeting, markets clearly signaled that they wanted such a solution, and are reacting positively,” said Peter Petri, a professor of international finance at the Brandeis International Business School.
“The big thing is that they’re holding off on additional tariffs. It gives the market some breathing room in the short term,” said Ernie Cecilia, chief investment officer at Bryn Mawr Trust.
At this point, Wall Street seems to be operating on the belief that no news is good news, Cecilia said. “The market seems to be probably OK with a stalemate of some sort, so long as there aren’t any real negative headlines.”
By making a broad-brushstrokes announcement while punting on details, Trump buys himself time, said Michael O. Moore, a professor of economics and international affairs at George Washington University. “It’s about negotiating leverage. Over the next six months the U.S. political calendar is going to put more pressure on the U.S. than it will on China,” he said. “My sense is that President Trump is feeling political pressure to get a deal, particularly in the upper Midwest.”
A U.S.-China show of recommitment to trade talks also provides a measure of political cover. “Both presidents can avoid some blame for possible economic or stock market downturns in the future,” Petri said, although China is likely counting on Trump’s unwillingness to spook Wall Street or Main Street ahead of the 2020 election, he added.
Whether or not the trade hawks in the Trump administration will be able to segue from announcements to action is an open question. “There’s a few months’ window in which they realistically could negotiate something, but it’s going to be difficult,” Petri said.
A spate of overlapping, somewhat contradictory reports involving Chinese telecom heavyweight Huawei illustrates the challenges the U.S. trade delegation will face at the negotiating table.
Although Trump indicated that U.S. tech companies would be able to continue selling software and components to Huawei in spite of concerns about national security, Democratic and Republican lawmakers criticized the decision, and White House economic adviser Larry Kudlow subsequently said that Huawei had not been given “amnesty” and remained, in principle if not in practice, on the so-called Entities List of blacklisted companies.
“The surprising Huawei reprieve eases the crisis, but it's really unclear,” Petri said. “We don't know what Trump's lifting the ban will cover or how long it will last.”
For trade negotiators to ultimately break the impasse, the devil will be in the details. “It would take some serious negotiation and most importantly, it would take a willingness on the U.S. side to compromise,” said David Dollar, senior fellow at the Brookings Institution. “I think there’s a good chance there won’t be any further agreement."
“As far as we know, the core issues of the trade war are still up in the air,” Petri said.
By leaving critical points of contention out of the conversation, the U.S. risks missing an opportunity to affect more structural changes. “There’s some fundamental decisions the Chinese need to make with how they interact with the world vis-à-vis industrial policy,” Moore said. “The most important thing for the U.S. has been changing some Chinese policies” pertaining to intellectual property, he said.
“To me, the biggest part of any deal would be to have any kind of intellectual property protection,” said Dan North, chief economist at Euler Hermes North America.
China might agree to buy more American airplanes or soybeans, but experts say there is no visible breakthrough on these tougher technology questions. “I do not see an obvious way forward on those issues,” Moore said.
And that could mean that American companies remain in limbo. Federal Reserve Chairman Jerome Powell touched on softer corporate investment in his remarks last week — and that troubling trend is unlikely to be reversed by a round of handshakes in front of news cameras, analysts said.
“Capital spending is a multi-year planning process,” Cecilia said. “It’s hard to see, based on what we learned over the weekend, how that is going to translate to a real change inside corporate boardrooms.”