While the short-term narrative of trade negotiations seems to shift on almost a daily basis, the general consensus is that a phase one trade deal seems imminent. Most pundits believe it will happen. The financial markets have essentially priced it in. Most people expect it to get done.
But a new wrench was just thrown into the mix.
The U.S. Senate unanimously passed the "Hong Kong Human Rights and Democracy Act" aimed at supporting protesters in Hong Kong against human rights abuses by China. It comes after a similar bill was passed in the House. Both bills would need to be reconciled before anything makes its way to President Trump's desk.
Predictably, Bejing is not happy about this.
The threat of retaliation by China isn't surprising, nor is it surprising that the Chinese government didn't take long to try to hit Trump where it hurts the most.
And with that, the president is in a really tough spot.
If there's one thing we know about Trump, it's that he likes to get his agenda passed and he likes it done with as little interference as possible. Trade with China has been his top economic priority and he knows that navigating those waters are his best chance to keep the economic expansion going, the stock market rising and even getting re-elected.
But now he's facing the unenviable task of trying to balance getting at least part of a trade agreement pushed across the finish line with appearing sympathetic to the plight of the Hong Kong protesters.
The Hong Kong bill has received virtually unanimous support from both chambers of Congress. Whether he signs the bill or not, it's likely to cost him some political capital in one form or another. Either he risks his trade deal potentially falling apart or he looks like the only guy in the government who sides with China over the pro-democracy protesters in Hong Kong.
I see a few possible outcomes to how this could play out. None will likely come without at least some form of consequence but some will be more palatable than others.
Outcome #1: Trump Signs The Bill Into Law
The president sides with the overwhelming majority of both Congress and U.S. citizens in supporting efforts for democracy in Hong Kong and fighting against human rights abuses in the process.
Upside: Trump is viewed as an empathetic figure who understands that human rights are more important than political gains, even if it costs a trade deal with China.
Downside: China punishes Trump for siding with Hong Kong. The phase one trade deal is off for the time being. The December tariffs go into effect and current tariffs continue. China ramps up its own tariffs. The global economic slowdown accelerates. The stock market starts falling.
Outcome #2: Trump Vetoes The Bill and Congress Is Forced To Override It
Trump decides that he doesn't want to jeopardize his highly-touted phase one trade deal with China knowing it's likely to help keep the economy going at least through the 2020 election.
Upside: Despite a strong jobs market and record highs for the S&P 500, the global economy, including here in the United States, is showing significant signs of slowing. Any rollback of tariffs, if they were to be included in a near-term agreement, would take a lot of pressure off of businesses, reduce costs for consumers and provide a tailwind that could push the financial markets higher. This would be especially enticing for a president who loves to publicize record highs in the stock market.
Downside: He would essentially be alone in failing to offer support for the bill. This likely alienates his standing with independent voters and even some conservatives making his re-election less likely. His approval numbers dip into the 30s.
Outcome #3: McConnell Fails To Bring The Bill To A Vote
Yes, I know that this bill has already made its way through the Senate, but remember a bill reconciled with the House, if changed, would need to go to a revote. McConnell has said many times that he wouldn't put anything up for a vote that the president wouldn't sign. If he knows Trump wouldn't sign it, would McConnell be the one to fall on the sword and take the heat for failing to get the bill signed into law in order for Trump to save face?
Upside: Even though the intent is pretty clear, Trump could deny that he vetoed the bill, claim to side with the Hong Kong protesters and yet save his trade deal by essentially giving the Chinese what they want.
Downside: The same as vetoing the bill outright. It's viewed as a cowardly act that irritates people who are already angered by McConnell's stonewalling of other House-passed bills.
Prediction: Trump Signs The Bill Into Law
Trump already likes to talk tough on trade by saying things like this...
In the end, it's difficult to come out looking at all likable if you're the only one not willing to sign this bill. Trump can easily blame China for not wanting to get a deal done and save face politically.
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