Market Insider

Trump finds trade peace possible on two fronts but China situation appears to be getting worse 

Key Points
  • President Trump appears to be making progress in trade talks with Europe and Mexico and Canada, but trade dealings with China appear to be at a low.
  • In a CNBC interview. Treasury Secretary Steven Mnuchin says he expects deals with Europe and on NAFTA soon, but he expressed disappointment that China failed to approve a deal that would allow Qualcomm to buy NXP.
  • Trump's moves to reach agreements with Europe and North American neighbors come as the president needs to show a positive win from his trade tactics before he pivots to deal with China.
US President Donald Trump (L) talks to European Commission President Jean-Claude Juncker ahead of a working session the G20 leaders summit in Hamburg. 
Mikhail Metzel | TASS | Getty Image

President Donald Trump appears to be making important progress in trade talks with U.S. allies, but on the Chinese front, matters seem to be getting worse.

Treasury Secretary Steven Mnuchin said on CNBC on Thursday that he expects real progress to be made in talks with Europe, and he expects an agreement with Mexico and Canada soon on a revised North American Free Trade Agreement. U.S. officials were meeting Thursday with Mexican officials in a bid to reach an agreement before September.

Just as Trump stood in the Rose Garden on Wednesday announcing talks and a truce on new tariffs with European Community President Jean-Claude Juncker, U.S. chipmaker Qualcomm was set to reveal its plan to buy NXP Semiconductors for $43 billion was dead. The failed deal is a casualty of the trade war because China did not approve it by the deadline.

The progress in talks with Europe also comes as Congress has become more adamant about the collateral damage from Trump trade tactics, including the hit to farmers that the administration tried to sooth this week with a $12 billion bailout package. Companies like GM and other automakers, are also making it clear that costs are rising as a result of tariffs, and business lobbies have sought to stop further tariffs, particularly on automobiles, which could have a wider, more significant impact on the economy and jobs.

While there are promising signs with Europe and North American neighbors, the failure of the Qualcomm deal is symbolic of the core issues with China, which the U.S believes is on a one-way street to benefit from U.S. technology while limiting access to its own market.

Mnuchin said he had spoken to Chinese officials about Qualcomm, but they still did not grant approval for the deal. "I'm very disappointed they didn't get regulatory approval. I specifically had conversations. Unfortunately, I think this is another example of where it was approved in every single other territory. We're just looking for U.S. companies to be treated fairly," Mnuchin told CNBC's "Squawk Box."

Administration officials have said talks with China have stalled, but there continues to be contact at lower levels. The U.S. slapped tariffs on $50 billion worth of Chinese products, and China retaliated. Tariffs on the first $34 billion went into effect earlier this month by both countries, with the balance yet to be implemented. But there are bigger threats in the balance, with Trump proposing $200 billion more in an effort to get China to ease its position on U.S. intellectual property and tariffs.

"What you're seeing now is the U.S. clearly needs to get the trade spats out of the way, move them to the side and focus on China," said Daniel Clifton, head of policy strategy at Strategas Research. "They're moving both of them on parallel tracks on the EU and NAFTA at the same time so they can move on to China. That's why I think U.S. officials are more likely to negotiate today than they were a month ago."

Mnuchin said the U.S. and Europe will immediately work to end existing tariffs on steel and aluminum and other goods.

The crux of the trade efforts have been mostly aimed at China all along, and Clifton said the administration's reference to revamping the World Trade Organization is an important step.

"The WTO reform is the essence of what Trump is trying to fix with China," said Clifton. China is considered a developing nation but its economy is the world's second largest. "They're allowed to have tariffs on average of 9 percent." A developed country would only be able to have tariffs in low single digits. "He's gotten buy in from Europe that maybe the World Trade Organization needs to be reformed. ... If we're reforming the WTO, we're doing it to make China play by a better system of rules," he said.

The relationship with China also appears tense, and it may get worse. Unclear is whether the Senate now will try to help ZTE, the Chinese communications that was banned by the Commerce Department from buying American products this year because it violated U.S. sanctions. The administration was trying to lift penalties on the company to smooth relations with Beijing.

"Mnuchin was just at the G-20 finance ministers and had no substantive discussion with the Chinese at all. The Treasury secretary called the chief Chinese negotiator and said approve the Qualcomm merger, and they said no," Clifton said. "This has to be settled at the presidential level," personally between Trump and Xi Jinping.

Trump on Thursday also showed that he's concerned about the economic impact of trade wars, and analysts have said he needs to show that his strategy is succeeding. He made a point of discussing how Europe has agreed to buy U.S. liquefied natural gas and soybeans, a crop that could be hit hard by tariffs already imposed by China.

"China looms large over this because number one, the most immediate thing you can see is we're going to have less demand for our soybeans from China. The EU is going to make that up," Clifton said. That sends the message to China that the U.S. will turn elsewhere.

"I'm sure they're also feeling a lot of pressure form the news that we had recently about the beef producers and the ag producers," said Juan Carlos Hartasanchez, senior director at Albright Stonebridge, referring to reports of U.S. beef piling up in cold storage. "When you have to put together a bailout package for your producers because of the impact of your trade negations had, I think that's the moment when the administration steps back and thinks ... these things are having an effect on U.S. jobs and on the U.S. economy. For them it's also a way to say we're making progress. We're not only losing, we're also winning."

Hartasanchez said the administration also sees that the countries it's having negotiations with are also having talks with others, like Mexico and the European Union, or the EU and its trade dealing with China. Canada and Mexico are also part of the Trans-Pacific Trade Partnership, which Trump exited.

"They're starting to see the world moving without the U.S., and I think that's alarming when they look at the aggregate of these markets without the U.S.," he said. "You could see the change in tone, but I think it could be a tone that could change in less than a week. But at least one has to be optimistic about the change of tone with the European visit and NAFTA."

Hartasanchez, who follows NAFTA, said there is still disagreement over the sunset provision, which the U.S. has been pushing, and a provision on how conflicts would be resolved. Canada has pushed retaining the resolution of trade conflicts by NAFTA members, but the U.S. has sought to drive disputes into local courts, something opposed by many U.S. companies.

The U.S. and Mexico had been having bilateral discussions, and the U.S. said it could do separates deal with Mexico and Canada. But on Wednesday, Mexican and Canadian officials said they wanted to work toward a trilateral deal, and were not interested in bilateral agreements with the U.S. Mnuchin said Thursday the administration was "indifferent" to bilateral or trilateral agreements.