So much emphasis and understandably so has been placed on the trade war by Wall Street and the investing public. The following information I believe will help you to have a better understanding of the magnitude and effect of our trade war with China.

In the wake of the G-20 summit in Japan this past weekend, the Trump Administration pulled back on imposing more tariffs. As investors, our job is not to be political, but to realistically assess situations that could have a meaningful impact on our investments. The course of the trade war certainly qualifies as one of those forces.

China believes any new agreement will need to be “evenhanded” — an equal reduction of tariffs on both sides. However, US officials want more than that. They want structural changes on the Chinese side: no more intellectual property theft, no more forced transfer of technology as a prerequisite for joint ventures, and ways to enforce these structural changes. These views are also supported by private industry as evidenced by the typical response to the weekend’s trade truce:

U.S. Chamber of Commerce:

The U.S. Chamber of Commerce is encouraged by today’s announcement by Presidents Donald Trump and Xi Jinping that both governments will return to the negotiating table and refrain from further escalatory actions, including new tariffs that would damage businesses, workers, consumers and the global economy. We hope each side is now prepared to go the last mile to achieve a high-standard, comprehensive, enforceable agreement. China must commit to addressing longstanding unfair trade practices and industrial policies that prevent a level-playing field for U.S. companies. Opening markets, increasing IPR [intellectual property rights] protection, and promoting fair and reciprocal opportunities in trade are in China’s own interest as it works to build a stronger and more innovative economy.

National Association of Manufacturers:

A trade deal, not a trade war, is exactly what manufacturers have advocated over the last year and a half, and today’s meeting brings us closer to that goal. We will continue to seek a new structure for the U.S.– China commercial relationship that eliminates unfair practices and opens China’s market through strong enforceable new trade rules…For too long, manufacturers have paid the price while China has reaped the rewards of its unfair trade practices, intellectual property theft and exploitation of existing trade agreements.

Last year’s G-20 meeting in Argentina ended the same way, with a 90-day truce. As we know, the lack of structural changes led to a new round of tariffs.

The Role of SOEs

The Chinese communist-based economy has been relying on its 109 state-owned enterprises (SOEs) to provide a substantial portion of employment, especially in areas where the government believes its oversight is necessary, such as defense, energy projects and management, communications, and transportation.

SOEs are highly over-leveraged with debt from preferential access to loans. They also promote legislation to reduce private competition. SOEs would not survive without subsidies and perks they receive, which is acknowledged by the World Trade Organization (WTO) as an unfair trade practice.

Lumbering inefficiencies and lack of incentives make it difficult if not impossible for SOEs to be innovative. That is why China has been “procuring” technology from the west, either by outright theft or by imposing technology transfers to domestic companies in exchange for access to China’s markets.

SOEs are enjoying increasing support from the Chinese government who want to make them more efficient and a larger force in the economy. The State-owned Asset Supervision and Administration Commission (SASAC), which was established in 2003, is currently concentrating on restructuring SOEs into modern profit-oriented corporations. However, the government insists on holding absolute control over final decisions. Efforts to privatize SOEs have slowed recently as the trade war escalated because the government began focusing on retaining centralized control to better prepare for economic threats.

What does all this mean to us as investors?

The likelihood of an escalating trade war is still present. The Chinese economic situation is difficult and delicate, and its plight will have a major impact on economies around the world. The Chinese government is responding to western markets through a centralized, government-controlled economy. Any structural changes are bound to slow and will not come without nearly unbearable trade pressures.

What this means is that this situation will likely continue for a while to come and can likely get worse before it’s resolved. China may well hold out and stall until after the presidential election hoping President Trump won’t be re-elected and they would be able to deal with a weaker,  lesser negotiator.

If you have questions about the above or feel I can help in any way with your retirement planning don’t hesitate to call.

Best regards,

Jeff Christian CFP, CRPC

 

The person who knows one thing and does it better than anyone else, even if it only be the art of raising lentils, receives the crown merits. If he raises all his energy to that end, he is the benefactor of mankind and is rewarded as such.

Og Mandino

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