Things are becoming clearer, even as they remain muddy.
Our trade dispute with China could spin out of control into a full-blown trade war. In hopeful anticipation of a pending deal with the Chinese late last year, up until a few weeks ago, we’ve been amply rewarded with a big stock market rebound after last fall’s sudden decline. However, negotiations appear to have broken down and the aggressive rhetoric has ramped up.
To some, this last-minute gamesmanship is just a predictable stage in the art-of-the-deal. Let’s hope. To me, however, it smacks as a sad display of amateur economic diplomacy. Rather than taking a wait-and-see approach, especially after such a strong start to 2019, I chose to make some portfolio risk management adjustments in the spirit of prudence.
A trade war is inherently an unhealthy development. The uncertainty impacts future hiring and business investment decisions. And, in turn, it sends the signal to consumers to hold back. In my view, the Trump administration is banking too much on the relative strength of the U.S. economy compared to the rest of the developed world in its tough-talk negotiating stance. It is also a mistake for Trump to say that “we’re just playing with the bank’s money” given the rise in the stock market since his election. To most normal people, not living inside Washington’s political bubble, their brokerage statements are titled in their names, not the bank’s!
Most sensible economists, both right-leaning and left-leaning, would argue the world economy is better off with mutually-beneficial trade pacts rather than economic isolationism. However, we are quickly approaching another heated election cycle and the demonizing of China plays very well politically.
In all fairness, China is not an innocent party when it comes to trade and cybersecurity violations. China’s policies have led to many incidences of outright intellectual property theft against U.S. companies and there have been verifiable Chinese-originated breaches of both our private and public computer networks. These are worthy issues to resolve.
Of course, it should also be said that U.S. corporations have knowingly transferred their proprietary know-how to the Chinese for many decades in order to gain access to that growing market. It’s been pragmatically viewed as the price of admission. While probably too late now, some corporate leaders are re-evaluating the trade-offs that have been made through their distorted lens of short-term profit.
In light of recent developments, the possibility of escalating, tit-for-tat actions and reactions are rising. This is especially the case as a sense of national pride on both sides is at stake. Given this, it is most certainly not helpful to be tweeting about how we are “winning” while our important trading partner is “losing.” But, sadly, these ill-chosen words have been used recently. As markets enter the proverbial dog days of summer, let’s hope the Chinese leaders, too, have learned to ignore the tweets!
Jason P. Tank, CFA is both the owner of Front Street Wealth Management, a purely fee-only advisory firm and the founder of the Money Series, a program committed to providing open-access to financial education, for all. Contact him at (231) 947-3775, by email at Jason@FrontStreet.com and at www.FrontStreet.com.