Daily Comment (August 2, 2017)

by Bill O’Grady and Thomas Wash

[Posted: 9:30 AM EDT] It was a quiet overnight trade.  The Reserve Bank of India did cut rates as expected.  Here are the trending news items we are watching:

Trade war with China: Several media outlets are reporting that the administration is opening a broad investigation into China’s trade practices with regard to intellectual property.[1]  China has pressed U.S. companies to reduce licensing fees, demanded joint ventures and is now requiring tech firms to set up China-based data centers if they want to do business in the country.  Complaints from U.S. companies over China’s behavior have been rising for some time.  Previous administrations and the companies themselves have tolerated these behaviors; the former to maintain relations and the latter to maintain access to Chinese markets.  However, U.S. companies have become increasingly jaded about prospects for growth in China.  We suspect that in the coming years China will be forced to see its growth fall by at least 50% to constrain debt growth.  At lower growth rates, the indignities that China enforces become a bigger issue.  Of course, the president ran on a protectionist platform, promising to boost jobs by reducing the trade deficit.  Up until now, the administration was offering China continued supportive trade relations if the Xi government constrained North Korea.  Now that it is apparent China is either unable or unwilling to act on North Korea, the president is moving on trade against China.  It’s difficult to measure the impact from a trade war with China.  Bilateral trade conflicts are complicated—we could see trade flows simply move to other nations and China won’t be all that affected.  On the other hand, given the complexity of global trade we may see unexpected outcomes, both positive and negative.  One thing to remember about trade is that the outcomes are full of tradeoffs.  Improving the standing of one party almost always comes at a cost to another.  The uncertainty factor alone could dampen both business and consumer sentiment.

Growing divisions within the White House: In one sense, this isn’t news.  After all, we have seen a number of firings from this administration.  However, one trend we are starting to notice is that cabinet members and others are directly contradicting the president.  President Trump clearly wants better relations with Russia, while VP Pence visits the borderlands in Russia’s near abroad and supports expanding NATO, a red line for Putin.  The president supports Saudi Arabia and the GCC against Qatar, while again SOS Tillerson visits to broker a peace deal and suggests that the GCC’s demands on Qatar are excessive.  President Trump engages in harsh rhetoric against North Korea; SOS Tillerson says today the U.S. does not seek regime change in the Hermit Kingdom and tells Kim Jong-Un that “we are not your enemy.”[2]  President Trump strongly suggests that he would like to decertify Iran[3] and scuttle the nuclear deal President Obama negotiated with Tehran; both Tillerson and DOD Mattis indicate Iran is meeting its treaty obligations.[4]  The AP is reporting that Mattis and CoS Kelly agreed early on in the Trump presidency that one of them should always be in the U.S. “to keep tabs on the orders rapidly emerging from the White House.”  Increasingly, we are seeing members of the cabinet moving to constrain the president.  So far, Trump is submitting to these actions.  It remains to be seen how long he will tolerate these differences.

The debt ceiling: Treasury Secretary Mnuchin suggested yesterday that the Democrats should support efforts to raise the debt ceiling.  The party leadership declined the offer.  There are rumblings from the Freedom Caucus that they will demand spending cuts to raise the ceiling.  This wing of the GOP is starting to look like it intends to hold its own party and the White House hostage.

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[1] https://www.wsj.com/articles/u-s-plans-trade-measures-against-china-1501635127 (paywall)  https://www.nytimes.com/2017/08/01/business/trump-china-trade-intellectual-property-section-301.html?hp&action=click&pgtype=Homepage&clickSource=story-heading&module=first-column-region&region=top-news&WT.nav=top-news&_r=0

[2] https://www.ft.com/content/485dffe8-76fd-11e7-90c0-90a9d1bc9691?emailId=5981537c1d69e900049eab93&segmentId=22011ee7-896a-8c4c-22a0-7603348b7f22 (paywall)

[3] https://www.nytimes.com/2017/08/02/opinion/trump-killing-iran-nuclear-deal.html

[4] https://www.reuters.com/article/us-usa-tillerson-iran-idUSKBN1AH5E7  http://www.cnn.com/2017/04/19/politics/tillerson-iran-deal/index.html