Source: Minsheng Securities, Chuan Reading Global Macroeconomics.
Author: Shao Xiang.
The tariffs imposed by Trump have entered the second phase of "negotiation," with a decrease in "gunpowder smell," and the offensive and defensive situations seem to have reversed. The White House has unexpectedly transformed from a "belligerent rooster" to a "nice guy": when the Japanese Prime Minister stated that there was no rush to reach an agreement, Trump eagerly claimed that a huge achievement (big progress) had been made in negotiations with Japan; despite the Chinese Foreign Ministry and the Ministry of Commerce denying that there were trade negotiations between China and the USA, he insisted that dialogue and communication between the two countries had always been maintained...
We previously stated that the peak of the tariff shock had passed, but this seemingly 180-degree turn is indeed surprising. Has Trump really changed his strategy under the pressure of the so-called "economic recession" and "market crash" in just two weeks? "Strangeness must have its source;" so how should we view the negotiation and development context of the 90-day easing period? Has Trump really backed down? What does this mean for China?
Listening to his words and observing his actions, we can further sort out the underlying framework and possible scenarios.
"Listening to his words," the most representative and summarizing statement is Trump's interview with Time magazine about the "Hundred Days New Policy." The content regarding tariffs is significant: in addition to reaffirming tariff revenues (making America rich) and the function of supply chain restructuring, there is optimism about trade negotiations, but it is extremely vague. For example, he said there are "200 deals" in progress, which will be completed and announced in the next three to four weeks. However, when pressed for details, Trump gave evasive answers.
Interestingly, Trump's statements about trade negotiations do not align with the official White House version. Although both aim to create a very positive atmosphere, the White House account states that there were meetings last week with 34 countries, focusing on evaluating 18 trade proposals.
"The more optimistic, the more suspicious?" It is important to grasp the direction and be wary of risks. On one hand, based on his experience since taking office, Trump is the "chief designer" of the White House's major policies, but he is very unreliable when it comes to specific numerical scales and timelines (often speaking off the cuff). An example can be found in the negotiations between the USA and Russia regarding Ukraine, which were said to be progressing rapidly in February, but currently it remains "a complete mess;" on the other hand, Trump 2.0 still maintains the full "businessman character." According to his autobiography "The Art of the Deal" (1987), doing business generally involves four stages: first, proposing astonishing goals; second, creating a media buzz; third, back-and-forth decision-making; fourth, obtaining tangible results. Based on historical experience, we summarize Trump's negotiation process into seven stages (as shown in Figure 2) – from layout and manipulation to closing the net, which will inevitably involve stages of "friendly conversation" and advancing negotiations.
Reflecting on this framework, the main risks are twofold: First, the risk of repeated negotiations before reaching an agreement. Before the deadline of July 8 (the final deadline for the 90-day tariff suspension), Trump is likely to leave the negotiating table due to dissatisfaction with the terms of the agreement; second, the risk that an agreement may not be reached. Time is not on the White House's side; over the years, negotiating counterparts have been continually learning and accumulating experience, and addressing multiple trades simultaneously may compromise the "art of the deal."
"Observing their actions," which countries are negotiating? What is the progress, and where are the bottlenecks?
How many countries hope to negotiate with the USA? According to Kevin Hassett, more than 75 countries and economies have contacted the White House to conduct trade consultations.
Negotiating trade consultations one-on-one with more than 75 countries within 90 days is nearly impossible. Therefore, for the White House, it has to either adopt a one-size-fits-all approach like 'reciprocal tariffs' or focus on 'grabbing typical cases.'
Focus on the main '18 countries' to identify commonalities and summarize templates. The Wall Street Journal recently reported on the White House's 'simplified negotiation roadmap.' While we believe the specific content still needs verification, the policy direction is relatively feasible—negotiating with important trading partners (18 countries/economies) and using this as a model for a 'consolidation of similar items' approach.
What is the substantial progress? It has been more than two weeks since Trump announced the suspension of reciprocal tariffs on April 9. Many countries have indeed established contact with the White House, expressing a willingness to negotiate, but the economies that have actually entered the substantive negotiation phase are very few—according to publicly available information, possibly only Japan, South Korea, India, and Indonesia.
There are many common points in the negotiation content. For example, imports of agricultural products and energy, reducing trade barriers, and opening domestic markets; there are military security dependencies on the USA, with military spending demands. Of course, there are also 'hidden agendas,' such as the exchange rate issues with Japan, military trade with India, and re-export trade demands from some Southeast Asian countries.
"The major powers" are not in a hurry, and "the small countries" aren't in a hurry towards the USA? From an overall perspective, economies like Japan, the European Union, and the United Kingdom are displaying a posture of not being in a rush to reach an agreement. South Korea will hold its presidential election on June 3, adding considerable uncertainty to the negotiation progress and outcomes. In contrast, India might be the first to reach an agreement with the USA. On the other hand, despite a strong desire to reach consensus with the USA, many smaller countries are only at the beginning stages of progress.
So, how should the framework of the Trade negotiation be viewed? We provide four perspectives:
First, reciprocal tariff negotiations are no longer just simple tariff or Trade negotiations. Especially when Trump revealed eight non-tariff fraud behaviors on social media on April 21, this became even more widely known. As mentioned before, the more non-quantifiable and unchangeable non-tariff factors are emphasized, it means that high tariffs will exist for a longer time, requiring more bargaining chips for exchange, or even leading to failure in reaching an agreement.
Secondly, what are the major categories of Trade negotiation templates?
From the two dimensions of Trade deficit and military expenditure that Trump cares most about, according to his logic, a large Trade deficit with the USA and low military spending are both seen as 'shearing America's wool.' As shown in the image below, the closer an economy is to the lower left corner, the more difficult the negotiation might be, while the opposite is true for the upper right corner. This may also explain why negotiations between the USA and countries like India and South Korea are progressing relatively faster.
Combining Trump's stance on relationships with the USA and reciprocal tariffs after taking office, several major categories can be further divided:
Japan: 'Tribute' template. A typical feature of such countries is that they do not retaliate against reciprocal tariffs and may even proactively lower their stance; they communicate actively with the Trump administration (e.g., proactively visiting the USA); they rely heavily on the USA for military and security (low defense spending or weak military power). This applies to most economies except for China, Europe, Canada, and Mexico, and can serve as a model for EU member states. Therefore, the White House places special emphasis on the agreement with Japan (relatively, the influence of an agreement with South Korea would be weaker).
India: the uniqueness of an independent geopolitical power. Although India adopts a low stance on reciprocal tariffs and diplomacy towards the USA, its treatment is indeed different: US Vice President Pence actively visited India for consultations; US Treasury Secretary Mnuchin stated misleadingly, 'India has fewer non-tariff barriers, does not manipulate its Exchange Rates, and government subsidies are very, very low, making agreements with India much easier.' The crucial underlying reasons include India's significant geopolitical position and status in the Indo-Pacific region; on the other hand, India's military dependence on the USA is not strong: from 2020 to 2024, as the world's second-largest arms importer, its sources of imports are mainly from Russia and France.
Europe: 'Both enemy and friend' model. Although the USA has a close relationship with Italy, its relations with France and Germany are not clear, especially regarding issues like Russia and Ukraine; more importantly, the EU has countermeasures, and Trump has always been 'vengeful.' Therefore, in terms of the negotiation sequence, it is relatively later than Japan, India, and others.
Third, how to view the personnel arrangement in negotiations? It is important, yet not important. What matters is that under Trump's administration, trade work is roughly divided into three parts: the "populist" represented by Navarro, the industry tariffs led by Lighthizer/Greil, and the more moderate Bessen, with attitudes towards tariff policy ranging from hawkish to dovish. Currently, in the negotiation phase, Bessen has noticeably greater influence, is responsible for more important economies, and the negotiation is progressing faster. However, it cannot be ruled out that, if subsequent negotiations do not go well, there may be a change of personnel midway. Saying it is not important cannot overlook Trump's 2.0 tariff policy "iron law"—Trump is ultimately the "decision-maker."
Fourth, regarding the US-China situation, the results of the negotiations will become bargaining chips. The trade negotiations between the US and China, on another level, are more like "players"; the 90-day negotiation is more like a "match," and the outcome of this game will serve as a basis for the next steps in the US-China relationship. Three points are worth noting:
The probability of substantive contact and easing between both sides during the 90-day pause is low;
The more unsuccessful the trade negotiations in the USA are and the longer they drag on, the more advantageous it will be for China;
In a stalemate phase, what to do if the economy is hit by tariffs? First, "tough it out," and appropriately grant "exemptions" for certain important commodities.
So how to view the possible scenarios?
From the USA's perspective, both economically rationally and from a game theory viewpoint, it would prefer to quickly advance and reach a trade agreement (at least a phase one trade agreement, similar to the US-China first phase trade agreement)—this not only helps reduce uncertainty but also strives to gain advantages in US-China negotiations; from Trump's personality, he holds grudges even when softened, and in the negotiation sequence, there will be obvious personal preferences, such as prioritizing Europe lower.
From China's perspective, insist on the attitude of "economic and trade struggle" and through economic and trade diplomacy's "vertical and horizontal alliances," strive to slow down the speed at which America reaches a trade agreement, which will help lay a better foundation for subsequent US-China negotiations.
How to measure the success of negotiations in the USA? From the perspective of the importance of economic and geopolitical changes, the negotiations between the USA and Japan, and the USA and Europe, are considered the two most important main lines, which can lead to four scenarios:
The USA and Japan do not reach an agreement, but the USA and Europe do reach an agreement: we believe this scenario has the lowest probability; currently, it is much more difficult for the USA to reach a trade agreement with Europe than with Japan.
The USA and Japan, as well as the USA and Europe, both reach agreements: this scenario also has a low probability, but it might be the most unfavorable situation for China, as it could imply that the USA's strategy of containment is beginning to show signs, and the USA's willingness to actively reduce tariffs on China is not high. The external pressures faced by domestic assets will increase, and the demand for policy support will be strongest.
The USA and Japan reach an agreement, but the USA and Europe do not: comparatively, this is less favorable for the USA, and the USA-China game will continue. In this scenario, China and Europe may strengthen cooperation, while Japan and other Southeast Asian countries may tend to 'ride the fence.' Trump can announce a phased victory in the USA's tariff war, and then the focus of policy gradually shifts to domestic issues in the USA, paying more attention to promoting tax cuts and Federal Reserve rate cuts; the USA-China game will continue, but to prevent China and Europe from further banding together, some compromises on tariffs may be made.
Neither the USA and Japan nor the USA and Europe reach agreements: this is the worst-case scenario for the USA, and the White House may continue to postpone the negotiation dates, turning Trump's foreign trade policy into a laughingstock. The White House faces a difficult choice: whether to intensify other policies to regain credibility, leading to further significant fluctuations in US assets; or to strategically compromise and change course, resulting in a rebound of global risk assets. However, this time, time is not on the side of the White House; the longer it drags on, the greater Trump's stubbornness cost and the courage required will be.
Risk warning: Trump's tariff negotiations are caught in a severe deadlock, and White House policies unexpectedly intensify, leading to global economic and market turmoil; tariff Diffusion surpasses expectations, resulting in a greater-than-expected slowdown in the global economy and increased market adjustments.
Editor/Rocky
