Optimism is rising that President Trump and Chinese President Xi Jinping might be able to de-escalate recent tensions when they meet in South Korea on Thursday.
The positive sentiment lifted U.S. financial markets on Monday and sparked confident vibes from Trump himself, who said about the forthcoming meeting, “I really feel good.”
The problem, of course, is that any unexpected snag or contretemps would confound those hopes and have a correspondingly negative effect on markets that have now priced in a more desirable outcome.
The array of economic issues at stake is dizzying, but the basic context for the Trump-Xi meeting is a relationship that has been vexed by recent tension.
Specifically, China tightened export controls on rare earth minerals earlier this month after the Trump administration had sought to curb China’s access to some American technology. Rare earths are vital for the manufacture of numerous products, from airplanes and missiles to more general tech.
A furious Trump complained, in an Oct. 10 social media post, that China’s position was “extraordinarily aggressive” and “extremely hostile.” By way of retribution, he threatened to impose a 100 percent tariff on Chinese goods “over and above any Tariff that they are currently paying.”
Since then, there has been a scramble on both sides to ease the friction created. The most tangible example so far is the agreement between negotiators for the two nations on a framework deal.
Treasury Secretary Scott Bessent told CBS News’s “Face the Nation” on Sunday that, partly as a consequence of the framework agreement the threat of the 100 percent tariff was “effectively off the table.”
Trump, for his part, told reporters on Air Force One of the potential agreement: “I have a lot of respect for President Xi, and we are going to come away with the deal.”
The Chinese side has been somewhat more circumspect about a meeting between Trump and Xi, but there does indeed to be some kind of agreement coming into view.
Again, in specifics, the Treasury secretary has suggested that Beijing will pause the stricter export controls. There could also be some form of easing regarding tariffs that each nation is levying on the other when ships dock at their respective ports.
Other areas that could see movement include the Chinese resuming purchases of soybeans from American farmers. Beijing’s refusal to do that is strategic, because U.S. soybean production is largely concentrated in Republican-leaning states, some of which — notably Iowa — are electorally important.
There has also been some talk that China could offer a form of words that would allow Trump to claim a victory in curbing the movement of substances that can be used in the production of fentanyl into the U.S.
Other topics, from prominent ones like the future of TikTok to the more complex like the exact nature of broader export controls between the two nations, could also be addressed
The positive mood music created the conditions for a strong day on Wall Street on Monday.
The Dow Jones Industrial Average gained more than 330 points, closing up roughly 7/10 of a percentage point. The broader-based S&P 500 did even better, rising 1.2 percent, and the tech-heavy Nasdaq composite did best of all, posting a gain of around 1.9 percent.
A China deal that lived up to Wall Street expectations could buoy Trump’s fortunes on the economy more broadly.
The president is in a peculiar spot in that regard.
Inflation has ticked up, albeit by less than most economists predicted in the wake of his new tariff regime coming into force, hitting 3 percent on an annualized basis in September. The unemployment rate stands at 4.3 percent, with some hiring figures having shown signs of weakness.
On one hand, the combination of inflation and employment data has created a “Goldilocks moment” where the Federal Reserve is expected to announce another interest rate cut on Wednesday.
The Fed has increasingly come to the view that the labor market — and the economy generally — would stand to gain from lower borrowing costs, and that easing rates would not cause inflation to pick up a real head of steam again.
The inflationary danger has not disappeared, however. Inflation is at a similar level to where it was when Trump returned to power in January.
An electorate bruised by rising costs in recent years is unhappy about that. Trump’s poll ratings on inflation are largely worse than on any other issue.
An Economist/YouGov poll earlier this month showed Americans disapproving of his handling of inflation by an almost 2-to-1 margin, 62 percent to 34 percent. The same poll showed the president underwater by 17 points on his handling of the economy generally, with just 39 percent approving and 56 percent disapproving.
The government shutdown is adding to the economically febrile moment.
The two parties are currently engaged in a blame game over the imminent cessation of Supplemental Nutrition Assistance Program benefits, popularly known as food stamps. Around 40 million Americans use the program, but the Trump administration says the available funds won’t cover the costs for November unless the government reopens.
The broader economic effects of the shutdown, as well as specific related issues like the expiration of subsidies for the purchase of health insurance plans through the Affordable Care Act, are also playing into the tense economic picture.
Trump is gambling that his willingness to play hardball will pay dividends. His allies amplify that message with Bessent praising the “leverage” the president had created in the recent negotiations.
But things could still go wrong on Thursday. For all the pomp and circumstance that has marked other elements of Trump’s Asia trip, it’s the meeting with Xi that really matters.
The Memo is a reported column by Niall Stanage.
Source: The Hill