Stocks Stay Flat Amid Mixed Messages on Trade With China

MANHATTAN (CN) — Wall Street is betting on an eventual resolution to escalating tensions between the United States and China, in spite of conflicting statements out of the Trump administration.

Greater losses at the morning bell hinted at a worse closing, but by the end of trading on Monday the Dow Jones Industrial Average fell only about 100 points, or 0.45%. The S&P 500 remained flat, while the tech-heavy Nasdaq increased nearly 1% for the day.

Markets in Asia also had a relatively steady Monday, with Japan’s Nikkei and Australia’s ASX 200 closing about one point up, while the Shanghai market ended the day flat.

Over the past two weeks, investors have grown increasingly anxious about a new trade war between the U.S. and China, with some White House officials and the president himself blaming China for creating the novel coronavirus in a lab and then covering it up.

In recent days, administration officials have sent mixed messages on whether the U.S. would increase tariffs or even back out of the recently enacted trade deal.

Speaking to CNBC Monday morning, White House trade advisor Peter Navarro said that “a bill has to come due for China” over its handling of the spread of Covid-19.

“It’s not a question of punishing them, it’s a question of holding China [to] account, the Chinese Communist Part [to] account, for what it did, not just to the American people … but also to the rest of the world,” he said.

Navarro claimed the spread of Covid-19 was “spawned by” China, which then hid the virus “behind the shield of the World Health Organization,” costing the United States $10 trillion to date.

Over the weekend, Trump threatened to terminate January’s trade deal, saying he was “torn” about whether he would tear up the agreement.

“Look, I’m having a very hard time with China,” Trump said on “Fox & Friends.”

Hours prior to those statements, however, the United States and China had agreed they should “enhance macroeconomic and public health cooperation, create a favorable atmosphere and conditions for implementation of the China-U.S. phase-one trade deal, and strive for positive outcomes,” according to a report on Friday by state-run media outlet Zinhua.net.

Regardless of what the Trump administration does, it's unlikely the Chinese now will be able to live up to their end of the trade deal, experts say.

“The problem is that the numbers are far higher than the amount China was ever able to import,” said Jennifer Hillman, a senior fellow for trade at the Council on Foreign Relations, noting that the previous time agricultural sales were high was in 2014 when commodity prices were similarly high.

Further, efforts to ramp up agricultural production to meet the trade deal’s goals — particularly with regard to pork, for which there is an increasing demand in China — may also prove extremely difficult since some meat processing plants have been shut down due to the spread of Covid-19.

“Workers have been ordered back to work presumably to feed Americans, and we’re turning around and saying you have to sell a significant amount of that pork to China,” Hillman said in an interview.

Others think China just needs to fulfill its part of the first phase.

“The Chinese government has tremendous power over what it purchases,” said Gary Hufbauer, a non-resident senior fellow at the Peterson Institute for International Economics, noting that China could stockpile agricultural purchases from the U.S. and cancel orders from other countries.

“The Chinese will make a big effort to meet the agricultural side of the deal,” Hufbauer said, noting that the Trump administration likely will be focused on that portion of the agreementas well. “Politically, that is the most important component of the deal.”

In the first phase of the trade deal, China agreed to purchase $200 billion in additional goods from the U.S. in exchange for lesser tariffs. However, a monthly report by the Census Bureau shows that despite the trade deficit between the two countries falling by $4.2 billion in March, U.S. exports fell by 10% during the first quarter of the year.

Most of that drop is easily attributed to the coronavirus-related lockdowns, first in China, where the virus originated, and then in the U.S. later in the spring. However, the drop in exports may also highlight an underlying problem with the U.S.-China trade deal.

“The targets were never realistic; they were just gaudy numbers meant to impress,” wrote Scott Kennedy, a senior adviser for the Center for Strategic and International Studies, in a study on Phase One. “The pandemic made the unrealistic the impossible.”

The trade deal had initially forecast an increase of 36.6% in U.S. exports to China for 2020. The biggest drops in U.S. exports were in manufacturing, which fell 11.7% year over year, and energy, which plummeted by one-third, Kennedy wrote. Under the deal, manufacturing had been forecasted to grow by 38%, while energy had been expected to increase by nearly 160%.

Kennedy wrote that Trump has several options, but that tariffs on new and existing products is the one the president will most likely choose.

However, experts don’t expect tariffs to drop soon, as it would stymie the economic recovery and likely hurt Trump’s chances at re-election if employed now while states struggle to reopen.

“Rhetoric now, no action until September,” Hufbauer said.

Further, tariffs now would mean the trade deal is almost certainly dead, Hillman said.

“If we decide to impose tariffs to punish China over Covid-19, there is no chance the Phase One is met,” she said. “No chance.”

According to Kennedy, the best choice for the Trump administration would be to “admit that the purchases component of the deal was a mistake to begin with and reconsider their entire approach to China.”

That, however, won’t happen, Kennedy wrote.

Follow @NickRummell

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