Dr. John Rutledge
Summary: I was on CNBC Power Lunch today to talk about the recent news that the trade war between the U.S. and China may be on hold and the link between trade discussions and negotiations with North Korea. You can watch a brief video clip by clicking here.
Before each show, I write a set of talking points for the producer so they can brief the anchors before the spot. Here are my talking points for today's show...
Talking points:
Trade talks went just as we said they would on the show last week and the week before. Trade is extremely complicated, not just about the goods trade deficit. You can’t solve a trade deficit with tweets. You can’t solve it by demanding that your trade partner 'reduce the trade deficit by $200B'. It can’t be solved by parachuting an inexperienced team into Beijing and expecting a miracle.
The ZTE part of the story is very strange, as we talked about on the show last week. There are a thousand important facts and issues involved, as I will post in a separate piece, including technology and national security issues, the economic interests of several large US companies and a recent $500 million loan from the Chinese government to a Trump-related resort development in Malaysia. My net view is that, in total, they are not going to get ZTE off the hook.
The most recent trade talks here in the US ended as I thought they would. China talked about cooperating more but did not agree to any trade deficit target numbers or specifics. US guys agreed to hold off on tariffs so they can talk some more.
Mnuchin’s “trade war on hold” comment is irresponsible for a Treasury Secretary to say. Trade wars are what happens when negotiations fail, not a strategy or tactic. Tariffs on hold on both sides would have been much better.
Mnuchin's latest remarks, revising his statement to "tariffs on hold", reveal that important changes are happening inside the Trump group. Both Larry Kudlow and Peter Navarro are good friends but I have not talked with either in the last week. There is a battle of the bands going on behind the scenes. Peter and the Protectionists are losing ground, because their plan isn’t working. Larry and the Free Traders are gaining influence. Larry is an articulate spokesman for markets (he has been doing more of the public explanation lately). Larry understands the complex interplay between trade, capital flow, and currency markets.
The trade issue is going to be with us for a very long time. Progress will be made on specific issues (e.g., IP), not on grand solutions. There are no rabbits to pull out of this hat.
There is one more interesting point that nobody has yet touched on: Trump’s trade policy (reducing the trade deficit with China) is completely at odds with his tax policy. If the tax bill achieves his objectives - getting US firms to pull capital back to the US and foreign firms to invest here - it will trigger increased capital inflows into the US. Through the magic of double-entry bookkeeping, capital inflows mean increased trade deficits will increase by exactly the same amount. I don’t think anyone in the administration has thought about this.
JR