A dealer works at a foreign exchange brokerage in Tokyo, Japan. (Photographer: Kiyoshi Ota/Bloomberg)

The Trump-Xi Truce Questions That Are Leaving Markets Flummoxed

(Bloomberg) -- President Donald Trump’s dinner with Chinese leader Xi Jinping yielded a cease-fire in the trade war between the world’s two biggest economies, though the details are proving less than satisfying to those hungering for a lasting truce.

Global stocks slumped Tuesday as investors grew skeptical that the U.S. and China made a meaningful breakthrough Saturday. Trump administration officials struggled to explain the deal, while Beijing has yet to confirm the terms.

“The market wants to see more details before it can make up its mind,” said Torsten Slok, chief international economist at Deutsche Bank AG. “It remains unclear for the market whether the trade war will escalate or deescalate from here.”

Here are some of the unanswered questions from the agreement:

What exactly will China buy?

It’s not clear. In its statement announcing the deal, the White House said China agreed to purchase a “not yet agreed upon, but very substantial, amount of agricultural, energy, industrial, and other product,” and will start buying “agricultural product” from American farmers immediately. Treasury Secretary Steven Mnuchin, on Fox Business Network Tuesday, put China’s trade commitments at $1.2 trillion, but said they need to be put “on paper”

But the Chinese statement on this weekend’s meeting only said Beijing agreed to buy more U.S. goods. Even if that happens, there’s no guarantee it would reduce the $336-billion U.S. trade deficit with the Asian nation, as Trump hopes to do.

The Trump-Xi Truce Questions That Are Leaving Markets Flummoxed

What ‘structural changes’ is China willing to make?

The two sides have given themselves 90 days to negotiate “structural changes” in the way China handles technology transfer, intellectual-property protection, cyber-theft and other issues. That’s a narrow window in which to solve some of their thorniest differences.

The U.S. alleges China forces American companies to cough up sensitive technologies and steals IP in order to modernize its economy. Trump officials are putting pressure on Beijing to tone down its ambitions to lead in emerging industries such as artificial intelligence, a compromise for which Xi has shown no appetite.

White House economic adviser Larry Kudlow said Monday the U.S. and China are “pretty close" to an agreement on stopping IP theft, though he didn’t give any details on the progress.

If the U.S. can extract concessions here, it could form the basis of a sustainable deal. There are signs of progress: China has announced an array of punishments that could restrict companies’ access to borrowing and state-funding support over intellectual-property theft

What are the next steps in the talks?

According to Trump, the 90-day clock started ticking following his “wonderful and very warm dinner” with Xi. Even before the dinner, there were preparations under way for Chinese Vice Premier Liu He to lead a follow-up round of negotiations, possibly this month in Washington. The U.S. point man will be Trade Representative Robert Lighthizer.

Lighthizer is a longstanding critic of China, which he argues hasn’t delivered on the pro-market reforms it promised when it joined the World Trade Organization in 2001. But he has shown a pragmatic streak, striking deals with South Korea as well as Mexico and Canada that were less restrictive than business leaders feared.

The Trump-Xi Truce Questions That Are Leaving Markets Flummoxed

What is China saying?

Not what the U.S. is saying, and that’s not a good sign. Beijing, for example, didn’t mention the 90-day deadline for talks on a deal over technology issues. The Chinese said the U.S. agreed to more market access, which the White House didn’t refer to in its statement.

China’s government isn’t yet able to formulate its response to the summit on trade with Trump as senior officials are still out of the country with Xi this week, according to three officials who were briefed but declined to be named as the matter isn’t public.

U.S. promises are already unraveling. Kudlow said Tuesday that the White House doesn’t have a deal with China to cut car tariffs, backtracking from a tweet by the president two days earlier.

How likely is this to end the trade war?

Investors seem to increasingly doubt it. After all, U.S.-China detentes have disintegrated before. In May, Trump disavowed a joint statement the two countries agreed to in Beijing that made vague pledges for China to buy more agriculture and energy exports.

One reason for optimism: Trump has now stamped his personal brand on U.S.-China economic relations. That gives him a strong political incentive to ensure talks don’t fail, as he girds for the next presidential election in 2020.

But China is showing little indication it would accept a major overhaul of its state-driven system, a move that economists say would be necessary to even out the trade imbalance that Trump scorns. If negotiations sputter, Trump has his finger on the trigger, as he made clear in a tweet Tuesday: “I am a Tariff Man.”

©2018 Bloomberg L.P.