US–China Trade War: What if There’s No ‘Deal’?

US–China Trade War:  What if There’s No ‘Deal’?

A collection of economists recently gathered in Sydney. All of them with the view that the trade war is practically over…

The president of UBS Asia Pacific, Edmund Koh, told the room that China has won the trade war.

He added that China has less to lose from this, and reckons that a resolution will be coming before quarter one.

Meaning that a resolution between our biggest ally and our best buyer could come as soon as March 2020.

Another notable expert in the room, Larry Jeddeloh, quoted a US defence document. Pointing out that China is using predatory tactics in the South China Sea, making them more powerful then we realise.

Furthermore, Jeddeloh noted that there’s only two things China wants from the US, with the Australian Financial Review writing:

Jeddeloh said the Chinese want two things to happen before they sign a trade deal. The first is to force the Americans to dump a bill put forward by Republican Senator Marco Rubio called the Hong Kong Human Rights and Democracy Act, which would place punitive measures on those who infringe upon “basic freedoms” in the Hong Kong.

The second thing the Chinese want, according to Jeddeloh, is for the US to lower tariffs.

If these are met, then the trade war could be off, implied Jeddeloh.

The mainstream suggests to us that the US­–China trade war could be all wrapped up not long after Christmas…

That view is completely at odds with Jim.

He has called the trade war’s twists and turns right for almost two years now.

Not only does Jim think the trade war is far from over…

…but it has much longer to run.

Jim reckons markets are pricing the China trade war as if it was a ‘done deal’.

Meaning stocks and gold are acting like all the risk has been taken out of the market.

Whereas he reckons the trade war is about to get a whole lot worse.

And investors could be caught off guard.

Read on for more.

Until next time,

Shae Russell Signature

Shae Russell,
Editor, The Daily Reckoning Australia

Markets are eagerly awaiting the conclusion of the so-called ‘phase one’ trade deal between the US and China.

Both parties are trying to reach a mini-deal involving simple tariff reductions and a truce on new tariffs, along with Chinese purchases of pork and soybeans from the US.

The likely success or failure of the mini-deal has been a main driver of stock market action for the past year. When the deal looks likely, markets rally.

When the deal looks shaky, markets fall.

A deal is still possible.

But investors should be prepared for a shocking fall in stock market valuations if it does not.

Markets reckon a deal is coming

Markets have fully discounted a successful phase one, so there’s not much upside if it happens.

On the other hand if phase one falls apart, stock markets will hit an air pocket and fall 5% or more in a matter of days.

But even if the phase one deal goes through, it does not end the trade war.

Unresolved issues include tariffs, subsidies, theft of intellectual property, forced transfer of technology, closed markets, unfair competition, cyber espionage, and more.

Most of the issues will not be resolved quickly, if ever.

Resolution involves intrusion into internal Chinese affairs, both in the form of legal changes and enforcement mechanisms to ensure China lives up to its commitments.

These legal and enforcement mechanisms are needed because China has lied about and reneged on its trade commitments for the past 25 years.

There’s no reason to believe China will be any more honest this time around without verification and enforcement. But China refuses to allow this kind of intrusion into their sovereignty.

For the Chinese, the US approach recalls the Opium Wars (1839–60) and the ‘Unequal Treaty’ (1848–1950) whereby foreign powers (the UK, the US, Japan, France, Germany, and Russia) forced China into humiliating concessions of land, port access, tariffs, and extraterritorial immunity.

China has now regained its lost economic and military strength and refuses to make similar concessions today.

In order to break the impasse between protections the US insists on and concessions China refuses to give.

This points to the fact that the ‘trade war’ is not just a trade war, but really part of a much broader confrontation between the US and China that more closely resembles a new Cold War…

China started it…

This big picture analysis has been outlined in a speech given by Vice President Mike Pence in October 2018, and a follow-up speech delivered on 24 October 2019.

Both speeches are available on the White House website.

Secretary of State Mike Pompeo has also added his voice to the hawks warning that China is a long-term threat to the US and that business as usual will no longer protect US national security.

The US–China trade war is not the anomaly globalists portray.

It’s not even that unusual viewed from a historical perspective. Retaliation from trading partners is all in the game.

Free trade is a myth. It doesn’t exist outside classrooms.

France subsidises agriculture.

The US subsidises electric vehicles.

China subsidises a long list of national champions with government contracts, cheap loans, and currency manipulation.

Every major economy subsidises one or more sectors using fiscal and monetary tools, and tariffs and nontariff barriers to trade.

Trump’s tariffs on China in January 2018 were reputedly the start of a trade war, but the war was actually started by China 24 years earlier when China devalued its currency (1994), and continued when China joined the WTO (2001) and immediately started to break WTO rules.

The trade battle is now joined, but no critical issues have been resolved and none will be in the near future.

The US cannot accept Chinese assurances without verification that intrudes on Chinese sovereignty.

China cannot agree to US demands without impeding its theft of US intellectual property.

This theft is essential to escape the middle income trap that afflicts developing economies.

The EU is caught in the crossfire.

The US is threatening to impose tariffs on German autos and French agricultural exports as part of an effort to force an end to German and French subsidies to favoured interests.

The US will win the trade war despite costs.

China will lose the trade war while maintaining advantages in intellectual property theft.

The trade war will continue for years, even decades, until China abandons communism or the US concedes the high ground in global hegemony.

Neither is likely soon.

All the best,

Jim Rickards Signature

Jim Rickards,
Strategist, The Daily Reckoning Australia