Thread by @Brad_Setser

I suspect a bit too much is being made of the fact that the latest trade truce lacks the trappings of a real trade deal. The deal seems pretty minimal & shouldn't be that hard to "paper" up over the next few weeks.

(1/x)

While Trump is Trump, it would be a surprise if he doesn't want the optics of a signing ceremony in Chile ... so I would be surprised if the "deal" isn't formalized by then.

(with the caveat that there may be more to deal than it now appears)

(2/x)

The U.S. basically recognized that it is running short of good tariff targets, and that raising tariffs further would hurt the consumer and risk a recession. And China basically recognized that it would have trouble sustaining a boycott of U.S. ag.

(3/x)

Brazil soy inventories are running low -- even with a reduced pig herd it would be hard for China not to import U.S. beans this harvest season.

grandforksherald.com/business/agric…

(4/x)

The tilt away from the U.S. last year really was extraordinary (q4 exports of US beans to China were more or less zero). But it was so big that in a sense it is hard to sustain (even with reduced soy demand in China)

(5/x)

U.S. pork imports would help hold down pork prices in China -- that's a true "win/ win" in the trade context (tho it will raise the price of pork for US consumers).

And China has been buying a lot of beef to offset the reduced supply of pork.

(5/x)

bloomberg.com/news/articles/…

Given the size of China's market, the high current level of protection of most parts of that market (soybeans used to be exception) and the scope for trade diversion ...

it wouldn't be that hard for China to push its imports of US ag above $30b next year.

(6/x)

It isn't even that much of a concession (hell, China has been offering it from the beginning). The only question is whether the tougher post Chile phase 2 negotiations will get in the way (and perhaps whether China wants to give Trump a political win)

(7/x)

And on the U.S. side, don't forget that the U.S. more than doubled the tariffs over the summer. The just pay it cost went from around $30b to around $80b. That's roughly a 20 bp of GDP tax hike ...

(8/x)

The last tariff lists sort of by definition are the worst US targets -- the goods where opportunities to substitute away from China in the near-term are limited and the tariffs more or less should be viewed as a consumption tax.

(9/x)

It seems pretty obvious that parts of the White House weren't terribly keen on rapid escalation and another 15-20 bp hit to consumers, particularly as there isn't a near term path to a comprehensive agreement.

(10/x)

So I at least view the "deal" as mostly a recognition by both parties of the limits of their position.

That raises the odds that it will be papered up in the short-run.

11/x

The risk as I see it comes after the phase 1 deal, not before.

There isn't an obvious path to a phase 2 deal

12/x

China still has oil and gas purchases (and a round of investment in US LNG capacity) to give, but what else?

Making it easier for GM to invest in China isn't a win in the UAW's eyes ...

13/x

So it seems to me that the real risk of re-escalation will come after the US soybean harvest has shipped out and after China's meat herd has been fed this fall, and as the phase 2 negotiations get serious.

The next few weeks should be (comparatively) easy.

14/14