President Trump and China are in the midst of finalizing a trade deal after Trump and China’s Vice Premier Liu He met in the Oval office towards the end of February. Based on the progress they made Trump postponed increasing the 10% tariffs on Chinese goods to 25%, which is one of the President’s main leverage points.

President Trump views himself as the best negotiator (along with being the best or most knowledgeable about pretty much everything), but he has four weaknesses in his China negotiations; setting a deadline, obsessing about the stock market, concern about his re-election and having a nightmarish backup plan.

While Trump and China will declare a deal as a win for everyone, and Trump will say it is the biggest deal ever, the harder issues such as forced technology transfers and stealing Intellectual Property or IP will likely have high-level language vs. detailed implementation. They will essentially “kick the can down the road” so that something can be announced.

Setting a deadline (and pre-announce a meeting in Mar-a-Lago)

In any negotiation setting, a deadline can have a positive impact to getting a deal done, but it can also weaken one of the sides negotiating position if the other side doesn’t have the need to strike a deal in the same timeframe.

Chinese leaders think in decades while Trump is pretty much looking for his next (or any) “win” so he can tweet about it. China has created 13 five-year economic plans since 1953, and its “Made in China 2025” industrial policy launched in 2015 aims to make the country a leader in multiple high-tech sectors. Having a self-imposed deadline makes Trump’s hand weaker at the table.

There were a number of reports that Trump would host Chinese President Xi in Mar-a-Lago around the end of March even before a preliminary deal was agreed to. It is now being reported the Xi has taken a March trip off his calendar, and while he may come in April that would probably be dependent on an agreement being reached before he arrives. Xi would not want to fly to the U.S. and come away empty handed (nor would Trump), and neither one (but especially Trump) wants a repeat of Trump’s Vietnam failure with North Korea’s President Kim.

Obsession with the stock market

By all indications, Trump is obsessed with the stock market since he views it as a proxy on how he is doing. While the Dow Industrials and S&P 500 have risen by 29% and 21% since his election (the blue circle in the graph below), they have been essentially flat but very volatile since the beginning of 2018 (the straight blue line).

The markets took into account the tax bill that was passed in late 2017. Even though earnings increased over 20% in 2018, stock prices saw that as a one-time event and are now forecasting flattish to very low earnings growth this year.

The markets have reacted on some of the days that the Administration or others either discuss or speculate on how the trade negotiations are going. However, there has been more of a muted response recently as investors anticipate a more watered down version of Trump’s rhetoric to actually be signed.

With the market being flat for over a year, Trump will want a deal to be reached to try and help the stock market. Stocks may rise when a deal is announced, but this could also be a “buy the rumor, sell the news” event unless a true blockbuster deal is announced.

Concern about his re-election

Trump (as does every politician) has the 2020 elections on their mind. However, with all the investigations whirling around him, Trump is especially motived to be re-elected. Striking a deal with China would fulfill one of his major campaign promises even if it falls short of having a major impact on the trade numbers. While the election is still 20 months away Trump’s wanting, and in reality needing, a China trade deal puts him in a weak negotiating position.

What happens if a deal is not agreed to

If a deal isn’t struck in the next month or so, Trump’s fallback position is to follow through on his threat to increase tariffs. However, this risks creating major havoc for U.S. companies and downside to the economy just as the 2020 election cycle really heats up.

This could be Trump’s biggest weakness since he can’t afford a deal to not be made therefore forcing his hand to increase tariffs. The economy has grown for almost 10 years and if 25% tariffs are imposed it could be thrown into a recession and create an even larger budget deficit than the $1 trillion path it is on.