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If Trump Removes Tariffs, The Trade War Dies And China Wins

In four days, tariffs on nearly $150 billion worth of Made in China goods will rise. In the best-case scenario for the market, they’ll be postponed. If postponed, they run the risk of rising again at some point early next year, if not kept on hold to be used if President Trump gets reelected. It is highly unlikely that existing tariffs will be removed, as China wishes. The tariff guillotine is still hanging sharp.

Should tariffs be removed as a gesture of peace with China, the trade war is over and China can take a victory lap.

China’s top negotiator, Liu He, has lobbied for the U.S. to at least put the December 15 tariffs on hold. He’s also asked for relaxing portions of the existing tariffs on some $360 billion worth of Chinese imports, the WSJ reported on Tuesday.

Trump has used tariffs as a key bargaining chip. Without them, there would be no trade war, and no new trade negotiations either.

China wants to roll back tariffs in order to stop the current supply chain exodus.

If Trump Removes Tariffs, The Trade War Dies And China Wins

Samsung has relocated some of its China factories into Vietnam and India.

Qilai Shen/In Pictures via Getty Images

An article in Wednesday’s edition of the South China Morning Post illustrates perfectly what is at stake for China. A large Samsung smartphone manufacturing facility in Huizhou, a city of roughly 4 million, relocated to India and Vietnam over the last year.

With no new jobs to make up for Samsung’s plant closure, some 60% of nearby businesses such as restaurants and shops have closed, the Post reported.

China is getting a taste of what off-shoring has done to blue collar labor across the United States since the 1980s, and at an increasing pace since China joined the World Trade Organization in 2001. It is not easy for cities to replace those jobs. China may come to discover this fact so long as tariffs remain a part of doing business with the U.S.

A tariff rollback would signal to businesses like Samsung that Washington is totally wishy-washy on trade. If so, why bother spending the time, money and effort to relocate when status quo is back? Corporate investment into China would be revived.

This whole phase one deal has gone off the rails.

Liu He and Trump claimed to have had a mini-deal ready back in October. Washington would defer tariffs if China stopped banning American agriculture. Chinese buyers have since returned to the U.S. soy market, but at levels far below historic averages. Besides, a return to the American soy market is not what Trump wanted. He wanted a doubling of agricultural purchases, something China could not do unless if it either abandoned Brazilian soy, pork and poultry, or increased its purchases and stored the bulk of it in silos.

If there was a deal we’d be hearing about it by now.

If Trump Removes Tariffs, The Trade War Dies And China Wins

A Trump voter wearing a Trump the Terminator shirt promoting the 2020 election campaign. Wages have … [+] risen, despite tariffs rising too.

Mark Makela/Getty Images

If there is no deal, Trump might have to sacrifice the stock market if he hits China with tariffs on Sunday.

“I think there’s a 70% probability that tariffs go up, and that is way off market,” says Brian McCarthy, chief strategist for Macrolens, a boutique investment research firm focusing on China these days. “How bad the market sells off if tariffs do go up is dependent on China’s response. If they have a big hissy fit of some form, it’s going to be bad.”

One weapon in China’s arsenal is its own currency. It could dump renminbi’s (RMB) into the local market, weakening it enough to cover for the higher tariffs.

The weaker RMB would have an adverse effect on the mainland China stock market, up over 25% year-to-date and one of the best-performing equity markets in 2019. A delay in tariffs would be a positive for China investors rolling into 2020, so long as the government can keep the economy from shedding too many jobs.

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