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After USMCA Passes, Why Worry About A China Phase One Deal?

The U.S., Canada and Mexico have sent in their final word on the new Nafta, and it’s ready for action. It just needs a vote in the House of Representatives. Once it passes the House here, Canada will pass it, Mexico will pass it. It will be a done deal. One less thing for trade wary investors to think about. Then there’s the phase one China mini-deal. But after the USMCA is inked, why worry about China?

CNBC host Jim Cramer was back on Squawk on the Street Monday morning saying Wall Street is not yet fully discounting the fact that President Trump can walk away from the trade deal with the Chinese. If so, tariffs go up on December 15.

When Mr. Mad Money himself goes on record saying Trump should go forward with tariffs this weekend, it could be game over for phase one. No one but the algo trades should be shocked at this point.

“I’m not worried about phase one at all. I think the markets have already overlooked China,” says Vladimir Signorelli, head of Bretton Woods Research, an investment research firm in the New Jersey suburbsspun off from supply sider Jude Wanniski’s Polyconomics some ten years ago.

The reason the market can tolerate a little bit more China pain is because Mexico and Canada matter much more to the U.S. economy than China.

There is at least $1.2 trillion in trade volume circulating between the three countries. China is second, but equal to Japan, U.K. and South Korea trade flow, and the U.S. has a trade deal already with South Korea, one on the way with Japan, and when Boris Johnson and the Conservatives in the U.K. win in the days ahead, the possibility of a U.S.-U.K. trade agreement becomes plausible, too.

“The passage of USMCA removes all imperatives for Trump to capitulate to China’s tariff rollback demands in a phase one trade deal,” says Brian McCarthy, chief strategist for boutique investment research firm Macrolens in Stamford, Connecticut. “Trump’s base will hate phase one and the media will hammer it as a capitulation. Trump knows it’s a political loser,” he says.

China recently offered the U.S. exemptions on its soy and pork exports, two top export items that China has basically banned for the last two crop seasons in favor of Brazil. That was an offer of good faith, in hopes that Trump would not raise tariffs this month on roughly $150 billion worth of consumer goods.

Should Trump go ahead with tariff escalation, China would likely pass on its exemption, meaning the U.S. has lost nothing because American farmers have already been dealing with this issue.

Without the passing of USMCA, Trump might have been inclined to wait a little longer on tariffs in order to see if China makes good on its promise to start importing soy again.

After USMCA Passes, Why Worry About A China Phase One Deal?

Shanghai- and Shenzhen-listed stocks of Chinese companies face the greater risk should a phase one … [+] mini-deal be shelved.

Visual China Group via Getty Images

Meanwhile, on Monday, China reportedly told government offices that it can no longer use foreign computers and software, the Financial Times reported today. They supposedly have three years to make the switch to locally owned computer companies like Lenovo and China-coded software.

For its part, the U.S. has been making life harder for Huawei, banning the Chinese telecom equipment maker from acquiring certain U.S. components for use in its 5G infrastructure.

Phase one now looks less exciting if Nancy Pelosi can finally bring USMCA to a floor vote and get it signed.

The S&P 500 is still on a tear, with the Federal Reserve’s rate hiking on pause. Chairman Jerome Powell signaled he was behind the current expansion and was not worried about historically low unemployment rates.

The U.S. economy has done well even with rumors of trade wars in Europe and higher tariffs on China. It’s also performed despite quantitative tightening and rate hikes in Trump’s first two years in office.

The Fed is no longer a headwind.

If tariffs go up on December 15, this could be time to cash out of China’s mainland equity markets. The A-shares have outperformed the MSCI Emerging Markets Index all year, up more than 25% in dollars.

The U.S. is collecting nearly $80 billion in taxes from tariffs. Imagine this: What if Washington put that money to good use, like providing relief for middle- and lower-income Americans in terms of education or health insurance subsidies? It would make the trade war worth it and lock in a future of higher tariffs against Made in China goods, in particular.

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