Investors breathed a sigh of relief May 21 when Treasury Secretary Steve Mnuchin announced that the U.S.-China trade war was temporarily halted so that the two countries could work out a trade agreement that’s fairer to U.S. businesses.

Essentially, the president has kicked the can down the road in hopes the Chinese cave under pressure.

Trump wants a $200 billion cut to China’s trade deficit from $375 billion. And despite rumors stating otherwise, the Chinese have only said that they will cut the deficit — either by reducing its exports to the U.S., which were $506 billion in 2017, or buying more than the $130 billion it bought from the U.S. this past year — providing no assurances of a specific amount.

The Trump economic team are playing with fire. They should never have introduced the idea of tariffs until getting to the negotiation table to discuss intellectual property rights and all the other trade abuses it feels the Chinese are committing.

If Trump’s not careful and gets ’s too preoccupied with the size of the trade deficit, he just might push the U.S. into a recession. Here’s why.

A High Trade Deficit = Low Unemployment

The U.S. economy is doing better than it has since prior to the 2008 economic crisis. The country’s essentially at full employment. At the height of the recession, the U.S. trade deficit was significantly lower than it is today while unemployment was more than 10%.

“You can’t say, ‘high trade deficits, we’re getting killed,” says Phil Levy, a senior fellow at the Chicago Council on Global Affairs who served on President George W. Bush’s Council of Economic Advisers. “We often see higher trade deficits when we have lower unemployment.”

Fixating on the trade deficit at a time when interest rates are rising is not a recipe for success.

The best way to reduce a trade deficit is to export more products that are made in the U.S. by creating trading partnerships such as the Trans-Pacific Partnership or NAFTA. Not by breaking them.

“The president may be unpleasantly surprised that his fiscal policy and his tax policy are working against his goal of reducing the trade deficit,” stated Brad Setser in December, a senior fellow at the Council on Foreign Relations.

Lowering the corporate tax rate from 35% to 21% while offering a one-time repatriation tax of 15.5% will put more money in the coffers of large-cap companies such as Apple Inc. (NASDAQ:AAPL), who had more than $280 billion overseas at the end of fiscal 2017.

However, it is unlikely to prompt increased investment by these companies because they already had too much cash prior to the December tax cut.

So, at a time when the federal government’s debt is at record levels, tax revenues are likely to drop over the next 12-24 months leaving it in a more precarious position.

What’s Next?

Well, I’ve been saying for some time that Trump’s moves to make it easier for U.S. businesses to make money, will end up hurting the economy.

David Rosenberg, the chief economist for Gluskin Sheff + Associates, thinks the corporate tax cut was a great idea. However, it’s all the other Trump plans, he believes, that will put America into a recession in the next 12 months.

“Ronald Reagan cut taxes in 1981 and the Fed triggered a recession that same quarter,” Rosenberg wrote May 19. “We had the historic tax reform‎ in the summer of 1986 and that didn’t stop the stock market a year later from rolling over in a very material way.”

Not only is the federal government’s debt at record levels, so too is corporate debt, which in March the Economist pegged at 73.3% of GDP, made worse by the fact that the deductibility of interest payments was reduced by the Tax Cuts and Jobs Act to 30% of EBITDA from an unlimited amount previously.

Private equity businesses, who thrive on debt, will be throttled by this change.

Bottom Line on U.S.-China Trade War

All I can say is the best trade deal is one where both sides feel like they left something on the table. To date, Trump doesn’t seem willing to do that. The Chinese aren’t going to acquiesce to the president’s demands if America doesn’t reciprocate and also leave something on the table.

It’s that simple.

As of this writing Will Ashworth did not hold a position in any of the aforementioned securities.