The story begins with the President of the United States announcing punitive tariffs on as much as $60B worth of products imported into this country from China. China has been playing outside of the rules ever since December 2001 when the country became a member of the World Trade Organization. China would impose far larger tariffs on US goods exported to China than were imposed the other way around. China would also force US firms looking to compete for the Chinese consumer to share technology, or seek partnerships with Chinese firms just to gain entry. That’s called extortion. Then there was the broadly suspected theft of intellectual property rights, which China has denied.
This US president, like his predecessors is trying to do something to even the playing field. A trade war, if one ensues will be costly to business, and to US consumers. The very idea is not market, nor business friendly, and almost seems odd coming from what has been a very pro-business administration. That is of course, only if you have paid no attention at all to this president over the last two years. The trade balance obviously irks him. My thought is that sometimes maybe you do stick up for yourself.
Part of the problem is that Americans don’t save. Not the government, Not very many businesses, and not very many people. Savings must then be imported in the form of trade imbalances. Our trade partners have taken advantage of this. It’s not their fault. The best interest of any government should be to pursue the best deals they can on behalf of their people. I think the president understands this. I do not think that the president thinks that he can completely level the playing field. I do think that he thinks that maybe he can improve what we now have.
China’s Commerce Ministry responded overnight. Targeted are $3B in US goods that include both fruit, and pork, as well as recycled aluminum, and steel pipes. This is less than 2% of all US exports to the nation. I have been asked a couple of times this morning if this was it. Did we win? I laugh. Not likely. This is round one. China understands that they have taken advantage of weak US leadership in the past, even if they will not say so publicly. China also understands that they share a symbiotic relationship with the US. We need them to help finance the US Treasury department. They need us to buy their stuff. Are they likely to pull the rug on their participation in US treasury auctions? Uhm, no. That would hurt their own investment. They are not stupid.
What China is doing with this response is buying time, which is exactly what president Trump is doing with this comment period. President Trump leads with confrontation, then negotiates back to an acceptable position. He’s not stupid either.
Did you ever get into some trouble in a bar late at night? Who hasn’t? You might talk tough, but you delay. You delay until you think you know how many friends the other guys has, and where they are. That’s what China is doing. Slowing things down, while talking tough. Seeing who joins the fray. After all.. you might remember those just implemented US tariffs on Steel and Aluminum. At first they seemed broad. The president allowed for comment. Hmm. Canada,and Mexico, our NAFTA partners were then exempt. Now suddenly the list includes Argentina, Australia, Brazil, every EU country, and South Korea. All of this leaves only China, Russia, and Japan impacted by those tariffs. seems targeted to me, though that was not how they were presented.
If all fails, the Chinese did leave plenty of room for escalation, and not just in the field of agriculture. This will last a while, gang. So adapt. Understand where the headline risk in your portfolio is, and either reduce that risk to where it does not cost you sleep, or hedge it somehow. By the way, Boeing (BA) is up 8 bucks this morning.