Donald Trump fancies himself as a great negotiator. But he’s made at least two big mistakes that’ll make it difficult for the US to come to a trade agreement with the Chinese.
Eventually, some sort of deal will be reached. Whether it will be honored is another matter. But whatever it turns out to be the talks would have been easier without these errors:
No. 1: Trump let the world know that he wasn’t happy with the level to which the Federal Reserve had raised interest rates.
No. 2: The president has been a cheerleader for the stock market.
Both of these mistakes are completely understandable. As president, Trump wants the stock market to rise and for Wall Street to pay homage to his economic policies.
And, of course, the guy in charge doesn’t want the Fed to raise the cost of borrowing money. That conflicts with the intent of the tax cuts passed by Congress and the White House and put into effect last year – namely, to make more money available to businesses and taxpayers.
The stock market has been negatively affected by a lot of factors – the trade talks, a slowing economy, interest rate increases and the government shutdown, just to name a few – over the past few months. One antidote – the way to get stock prices up – is a news event in which Trump or another government official says trade talks with China are going well
So, US trade negotiators were left vulnerable because the Chinese are able to both cause the stock market to go down in price and interest rates to go up.
Trump, the businessman, would never have tipped his hand in this way. Trump, the president, either felt he had no choice, or he had no willpower to let the topics of rates and the stock market be left unsaid.
A few more details may help to make this clearer.
The stock market has been negatively affected by a lot of factors – the trade talks, a slowing economy, interest rate increases and the government shutdown, just to name a few – over the past few months.
One antidote – the way to get stock prices up – is a news event in which Trump or another government official says trade talks with China are going well.
Whether or not there really is progress, the market reacts positively – especially from trading generated by automatic computer programs – whenever the headline comes across that the “talks are going well.”
I could get stock prices up tomorrow if we put that headline above this column and quoted an anonymous source about the great progress.
Conversely, China could get stock prices to fall in the US by saying the talks aren’t going well. And since the president has shown he is so concerned about stock prices, this gives the Chinese great leverage.
Beijing also has great leverage over American interest rates thanks to its ownership of approximately $1.15 trillion worth of US government bonds.
People argue China would never sell large amounts of these bonds because it’d have to invest the money elsewhere. Maybe that’s true, but the Chinese could certainly disrupt the US bond market – and cause interest rates to rise – by simply threatening to unload their holdings.
That translates into a case in which China has enormous leverage because of Trump’s obsession with keeping rates low.
And if that threat is made, the Fed and the US Treasury would have to scramble to find buyers for the massive amount of new government bonds that our government sells each year. Interest rates would spike and President Trump would certainly be displeased.
I guess negotiating with the Chinese over an issue as difficult as trade and tariffs is different from businessman Trump’s browbeating union leaders in the casino industry.
President Trump must realize that by now.
Published in Daily Times, January 16th 2019.