Trump's G-20 meeting with Xi about 2020 more than trade

As President Trump prepares to meet Saturday with Chinese President Xi Jinping at the G-20 summit in Osaka, Japan, most American analysts are focused on whether Trump will make a trade deal with China or play hardball and be willing to walk away from a deal.

Many believe that Xi is ready to make a trade deal with the U.S. But what if Xi does want a trade deal, just not with this president? 

If Xi would rather deal with one of the Democratic contenders who debated in Miami this week, he could eschew a trade deal with Trump. By doing so, he could suddenly and significantly unsettle U.S. equity markets and alter near-term U.S. economic growth, creating significant headwinds for Trump’s reelection chances.

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Trade agreements have historically been more about foreign policy than about trade. Tomorrow’s G-20 meeting between Trump and Xi will likely be no different.

Trump needs a deal. The economy is already slowing down, an issue Trump is painfully aware of, as evidenced by the fact that he reportedly explored demoting the Federal Reserve chairman.

Employment growth, while still expanding, has decelerated, significantly falling from an average of 223,000 jobs per month in 2018 to an average of 164,000 jobs so far in 2019.

The manufacturing sector, a critical part of Trump’s base, is approaching contraction. It now stands at its lowest reading in nine years, according to the IHS Markit manufacturing Purchasing Managers index.

Business confidence is also waning. According to the most recent Duke Fuqua survey nearly 50 percent of CFOs believe the U.S will be in a recession by the second quarter of 2020. Whether or not they are correct, their pessimistic views will surely further temper what is already slowing hiring and business investment, constraining the employment and economic growth upon which incumbent presidents depend for reelection.

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Then there are the U.S. financial markets. The 10-year Treasury rate is quickly heading toward 2 percent, causing the closely watched spread between 10-year and 3-month Treasury rates to invert. This has led many to wonder if a recession is on the horizon. Meanwhile, equity markets remain in a state of heightened angst, hanging on every presidential trade war tweet. 

The U.S.-China trade war is taking a toll on key voting blocs in states crucial to Trump’s reelection prospects. Farmers continue to struggle under the weight of depressed agricultural prices. Iowa, Wisconsin, Michigan, Ohio and Pennsylvania each saw its goods exports to China decline significantly in 2018.

How crucial are these states? They are all states that flipped from Barack ObamaBarack Hussein ObamaBiden Supreme Court study panel unanimously approves final report To advance democracy, defend Taiwan and Ukraine Press: GOP freak show: Who's in charge? MORE in 2012 to Trump in 2016. But none is a sure bet to back Trump again in 2020. For example, Trump won Michigan by a mere three-tenths of one percent, or 11,000 votes.

As the 2020 presidential election rapidly approaches, Trump needs a trade deal with China, or at least a truce until after the election. Xi knows this, which is why he may take the trade path less expected, walk away from a deal and do all he can to disrupt Trump’s reelection prospects.

Chris Macke is the author of "Solutionomics." He is a contributor to the Fed Beige Book. Find him on Twitter: @solutionomics.