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Markets unmoved as Trump’s trade war remains elusive

US President Donald Trump’s signature campaign promises were wide-ranging and included many proposals that everyone, including Trump, knew were impossible.

“Who’s going to pay for the Wall,” he asked campaign rally after campaign rally? “Mexico!,” responded the raucous crowds.

White House chief of staff John Kelly noted last week, to Trump’s objection, that the president’s position on the wall has “evolved.” Of course it has. It was an extreme position based on no practical considerations.

So what about the trade calamity that was expected by many after Trump’s victory?

Markets have a host of reasons to dismiss the possibility. For one, to the extent that a true all-out trade war would weigh on stock market exuberance, Trump would have every reason to avoid such an outcome at all costs. The booming US stock market is, after all, one of his favorite talking points.

China has pointed out that such a confrontation would be a lose-lose situation for the two most important economies in the world.

But despite the lack of concern, the White House is giving every indication that this is one campaign promise that Trump will follow through on soon.

From Politico’s Morning Trade brief on Monday:

WHITE HOUSE: CHINA THREAT UNITES ADMINISTRATION: A senior White House official said reports of a split between economic nationalists and globalists within the Trump administration are exaggerated, and that the entire administration firmly believes the U.S. must confront China over its unfair trade practices to maintain its economic edge.

“I know you guys love to write stories about different factions in the White House — the nationalists and the globalists,” the official told reporters Friday during a briefing on Trump’s trade priorities. “The truth of the matter is none of us see it that way. I think there is actually a convergence of views on quite a few issues as it relates to trade.”

As Daniel Rosen writes at the Rhodium Group, forces pushing hard for a confrontation with China on trade go far beyond the White House. They go beyond partisanship, and even beyond the United States, as Brussels is increasingly aligned with Washington on key China trade-related issues.

The Trump administration connected economic affairs to the China national security equation at the end of 2017, with the unveiling of a dramatic strategic shift. And, while the US has yet to take any trade action that will send the bilateral relationship spiraling into a trade war, some gears have already been set into motion.

Rosen writes:

Of four bilateral dialogues President Trump kicked-off at Mar-a-Lago, three are frozen (economics, law-enforcement, and people-to-people: only the military-to-military channel is still operational, largely on the topic of North Korea).  Dozens of agency-to-agency channels of engagement set up over the past decades are in hiatus. Very few American officials are visiting China. China is not alone in this regard, but the US-China bilateral agenda is more important that virtually any other. This reduces the channels for managing and delivering solutions on the broad spectrum of bilateral issues in the future.

Indeed, stronger implementation of the bilateral dialogue mechanisms was one of the issues Xi Jinping brought up with Trump when they spoke most recently.

But what about the backlash from Beijing? Would trump really be willing to risk the US stock market and economy that he will rely on for reelection?

Rosen notes that some in Washington “scratch their heads at the thought that a trade surplus country (China) could win a trade war.”

“The US is going into a temporary surge in growth due to the tax reform stimulus, which might give it resilience the next several years, whereas China is wrestling with the need for difficult deleveraging,” he adds

There may be every reason for the Trump administration to steer clear of a trade war with China. But there is also every reason to take the possibility seriously.

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