Peter Schiff: The Art of the Fake Trade Deal

Donald Trump and Chinese Vice Premier Liu signed the Phase 1 trade deal on Wednesday. The mainstream was generally bullish on the news, but there was some underlying concern because the deal did not bring substantive tariff relief. Peter Schiff broke down the deal in his latest podcast, saying that despite all the hype, the deal was really much ado about nothing.

The Chinese pledged to buy an additional $200 billion worth of American goods over two years. The Chinese will primarily buy US agricultural products and energy, but the deal includes $80 billion worth of US manufactured goods, including aircraft, autos and car parts, agricultural machinery and medical devices. According to Reuters, “Commitments include $54 billion in additional energy purchases, $78 billion in additional manufacturing purchases, $32 billion more in farm products, and $38 billion in services.”

Trump called the deal a “big, beautiful monster.”

“Our farmers will take it in. I keep saying, ‘Go buy larger tractors, go buy larger tractors,’” Trump said during a rally in Ohio last week.

The US will roll back some, but not all of the tariffs it imposed over the course of the 18-month trade war. The deal canceled planned tariffs on cellphones, toys and laptops. It also cut levies on about $120 billion in Chinese goods to 7.5%. But the 25% tariffs on $250-billion in Chinese industrial goods and components will stay, along with China’s retaliatory tariffs on over $100 billion in American goods.

Trump said the tariffs will be removed in a Phase 2 deal.

“I’m leaving them on because otherwise, we have no cards to negotiate with. But they will all come off as soon as we finish Phase 2,” Trump said at the signing event.

The markets reacted positively to the news. The Dow Jones closed about 29,000 for the first time ever, and other major indexes including the Nasdaq and S&P5000 made record highs.

Peter said some of the recent stock market gains were certainly driven by the Phase 1 trade deal.

But the majority of the gains are clearly are the result of the Fed. The Fed’s policy reversal, its taking away the rate hikes and delivering rate cuts instead, its quietly returning to QE — even though its officially denying it’s doing it, it’s clearly doing QE. And that is what has been driving the market. Although, I think the anticipation of the trade deal has acted as a rumor that traders continuously bought, bought, bought.”

Now that we have a deal that investors can actually scrutinize, it will be interesting to see if the markets begin to sell off.

There really is nothing to look forward to anymore. I mean, the so-called good news is now in the past. In the meantime, traders can start focusing on all the bad news they’ve been ignoring and the even worse news that’s likely to come in the future. So, we could see a selloff, particularly when people really start to think about the deal and what it actually delivers.”

The hyperbole surrounding the signing of the Phase 1 deal was at level 10. It’s the greatest deal ever. Nobody has ever seen a deal like this. Peter said that may be true.

There’s never been a deal so inconsequential and insignificant as this deal.”

Peter said when the deal was announced that it wasn’t a “real deal.”  There was nothing in the details that caused him to change his mind.

The Chinese have primarily agreed to buy US commodities – agricultural products and energy. Peter pointed out that could mean they buy less from other countries. Or, they could stockpile these commodities.

Which would be a lot better than stockpiling US Treasuries. In fact, it would be a huge win for China if it does end up buying extra commodities to store, and it pays for it by selling US Treasuries — if it takes money that it otherwise would have loaned to the United States government by buying Treasuries and instead buys actual stuff that they can really use and has value — that is a win for China. It’s a double win for China. They get rid of Treasuries that are going to collapse and they buy more real commodities that are going to go up in value.”

It is also possible that by sending more commodities to China, domestic supplies could shrink, causing prices to go up for US consumers.

The Phase 1 deal doesn’t do much to bring back US manufacturing. Peter likened it to a colonial relationship where the US just grows stuff and harvests things while China does the high-end manufacturing.

So, we’re not going to get more manufacturing jobs. We’re just going to keep our lousy, low-paying service sector jobs. But now those service sector workers, rather than getting better jobs, they’re just going to have higher bills when they go to the supermarket, when they go to the gas station; they’re just going to be paying higher prices.”

Tariffs will basically be frozen at a moderately reduced level. Peter called this bad news given that American consumers are primarily bearing the brunt of these taxes.

Peter pointed out that there is a clause in the deal that stipulates if either party complains about the other not living up to the deal, the party that is complained against can terminate the deal if it determines the complaint was in bad-faith. Peter said this isn’t really a deal at all.

This is just a list of suggestions. This is just a list of things that either party may decide to do or may not decide to do. And if one party doesn’t do what the other party thinks it’s supposed to do, and then that party complains, well, it doesn’t have to do anything at all because it just drops out of the deal. So the deal is much ado about nothing … It’s not a big positive for the economy. It’s not a game-changer.”

Furthermore, Peter said he doesn’t think there will ever be a Phase 2 deal.