Let the Trade Winds of Clarity Blow

(Bloomberg) --

A cold westerly wind blew through Beijing on Sunday and rid the city of the acrid gray muck that had hung over it last week. The result: A rare blue-sky moment of chilly clarity.

That bracing moment is something the trade wars could use these days and one markets would happily give thanks for this week. 

China this weekend announced new guidelines aimed at stopping intellectual property theft that became the latest positive signal for trade talks. But we are still in a murky end-game for a “phase one” deal that Donald Trump on Friday declared “very close” and Xi Jinping earlier that day insisted he wanted too. There’re plenty of things a cleansing wind needs to blow away before the deal is done. There’re also some immovable objects. 

• Trump’s comment on Friday that the Hong Kong protests are a “complicating factor” for the trade negotiations is an understatement. The heavy turnout for normally dull district council elections on Sunday (and the strong support garnered by pro-democracy candidates) seems to be an unavoidable signal that the financial center’s paroxysm will persist for some time. Chinese state media’s stepped-up denunciations of the U.S. Congress’s overwhelming and bipartisan passing of a bill meant to support the protests may be a ritual venting. Then again the bill seems more likely to become law than to be vetoed by Trump.
• The trend line in these trade discussions has often bent to miscalculations on both sides. It may trend there again. Trump is eager to project insouciance at the idea of new tariffs going into effect Dec. 15 if a deal isn’t concluded even as Xi is calling for a substantial chunk of existing tariffs to be rolled back. Meanwhile, equity markets are hitting record highs, which has been a signal in the past for an overconfident Trump to do something brash. And in Beijing it is not hard to find former officials who will privately remark Trump’s impeachment ordeal makes him seem “very weak.”
• Former officials on both sides bemoan the absence of nuance in the current relationship. Then again neither side makes nuance easy. The official China Daily published a 6,000-word essay by Vice Premier Liu He, China’s lead negotiator, on Friday. According to the initial analyses it — without any irony — built the case for a stronger role in the economy for both the state and markets. 
• There is an almost structural suspicion in the relationship fed by national security fears. On the U.S. side it’s reinforced regularly by new spy tales (see here and here) that augment the view of a malign China. Those stories also drive the campaign against Huawei and the Washington hawks’ argument for a new clear-eyed approach to China. 
• On the Chinese side the suspicion is fueled by history. Meeting with a delegation from the Bloomberg New Economy Forum on Friday, Xi again invoked China’s history of being forced into “unequal treaties” by foreign powers, a reference to the 19th century colonial assault in which ports like Hong Kong played a central role. Wander into the National Museum off Tiananmen Square and the “Road to Rejuvenation” exhibit that lays out the official Communist Party version of history going back to the 17th century and you are reminded that unfair trade and trade wars are at the heart of modern China’s founding grievances and narrative. Just as they are in America. Or for Donald Trump for that matter. 

Charting the Trade War

Surging rare-earths production in China is presenting a new challenge to budding efforts in the U.S. and elsewhere to undercut the Asian giant’s dominance in a market for exotic materials used in everything from smartphones to fighter jets.

Today’s Must Reads

• Game of chicken | The U.S. has moved closer to resuming lucrative chicken exports to China after more than a hundred American processing plants were given approval to ship to the Asian nation.
• Japan-South Korea bickering | The two countries took fresh swipes at one another, raising questions about whether relations would improve after they reached a last-minute deal to rescue an expiring intelligence-sharing pact.
• Lucky Laos | Landlocked Laos may be a net beneficiary of the U.S.-China tension: Chinese foreign-direct investment has climbed since the trade war began as firms seek alternative manufacturing sites to avoid U.S. tariffs.
• Soy sorrow | China’s imports of U.S. soybeans contracted to the lowest level in three months in October as the world’s biggest buyer delayed unloading of American soybeans at its ports.
• Tortuous path | Perhaps no corporate executive in America has been whiplashed more by Trump’s trade wars than Tom Werner. Read Brian Eckhouse’s account of the SunPower CEO here. 

Economic Analysis

• Asia detente | A de-escalation in tensions between South Korea and Japan is a positive signal for both beleaguered economies, but it’s still just the first step in a process that will likely take a long time to be fully resolved.
• Feeling squashed | A recent trade deal preventing Mexican tomato growers from selling in the U.S. at less than fair value will stay in place after the International Trade Commission ruled such dumping threatens the domestic U.S. industry.

Coming Up

• Nov. 26: Hong Kong trade balance, U.S. advanced goods trade balance
• Nov. 29: Vietnam exports

To contact the editor responsible for this story: Zoe Schneeweiss at zschneeweiss@bloomberg.net, Craig Stirling

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