One day, the U.S.-China trade war will “end”. (But as I told CNBC… not just yet.)
But even when it’s “over” – with a nice public make-up and the signing of an agreement between U.S. President Donald Trump and Chinese leader Xi Jinping – it won’t actually be over.
Why? For one thing, when he was running for president, Trump promised a trade war with China – and it’s one promise he can keep. Why end a good thing? You don’t hear many American politicians saying, “Let’s get closer to our good friends the Chinese!”
For another thing: Trump has mastered the “rally ‘round the flag” effect. The Oxford Research Encyclopedia explains that as “… a surge of public approval for the president when the nation is involved in an international crisis.”
In other words… manufacture a “crisis” to distract the public from other things that are going on. And a trade war is a close enough approximation for an international crisis (and goes well with other manufactured crises).
But the U.S.-China trade war might have to share the limelight.
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Where next? Follow the money
One way to anticipate Washington’s next trade move is to look at countries that run a large trade deficit with the U.S.
A trade deficit is the amount by which the cost of a country’s imports exceeds the value of its exports. If the U.S. runs a trade deficit with country X, it means that country X sells more to the U.S. than the U.S. exports to country X.
There’s nothing inherently wrong with running a trade deficit. But a trade deficit is like a red flag to a bull for a U.S. White House focused on bringing manufacturing jobs back to U.S. soil. And it’s an easy, if oversimplified, sound bite to say, “The bad guys in a land far away need to buy more of our stuff! It’s only fair!”
As the graph below shows, China is the leading offender in the trade deficit sweepstakes with the U.S. Despite, or because of, the ongoing U.S.-China trade war, the U.S. trade deficit with China hit US$336 billion in 2017. (If a country runs a trade surplus with a trading partner, by definition the partner is running a trade deficit.)
After China, Japan, Vietnam and India are the next three countries in Asia that have the biggest trade surpluses with the U.S., as shown below. (Final data for 2018 isn’t available yet. But it’s forecast that the U.S. trade deficit with China hit a new high.)
The U.S. runs a trade surplus with Hong Kong and Singapore.
The case for Japan
The trade deficit with Japan is the second-largest for the U.S. And that could be bad news for Japan…
The Financial Times reported last week…
“The US has launched an investigation into the possible threat to national security posed by imports of titanium sponge — a product that is widely used in the aerospace sector and mostly bought from Japan.
The move was announced by the commerce department on Monday evening and could emerge as a new sore point between Washington and Tokyo as they prepare to enter formal negotiations on a possible trade deal.”
Never mind that the value of titanium sponge imports to the U.S. from Japan amounted to just US$208 million in 2017, according to the Financial Times… compared to the US$350 billion of auto imports from Japan to the U.S.
The U.S. government wants Japan to reduce import tariffs on U.S. agricultural products and agree to quotas on car exports. Japan’s government, though – with elections coming up – won’t want to be seen by the Japanese electorate as bowing to American demands. Does that sound familiar?
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What it means
Trump has a point regarding China’s trade tactics, as we’ve said before. China has gotten away with taking foreign intellectual property. It’s also created a deeply uneven playing field for foreign investors.
But China is, well, China – by some measures already the world’s largest economy. It’s the major emerging economic force of the past generation. So China has been able to get away with things that wouldn’t be tolerated of anyone else.
But just because some of the objectives of the war are good, doesn’t mean the war is good. And using the U.S. trade deficit as a scorecard is like using a thermometer to gauge rainfall – it tells you something, but you’re not sure what, and you don’t know how to use it.
Last year, China was one of the world’s worst-performing stock markets, partly because of the uncertainty created by the trade war. If Japan is next on the list, investors in Japan won’t be happy. If Japan finds itself in the trade crosshairs, shares there could fall sharply in coming months.
But for China… it’s good news. A cease-fire in the trade war (even if it’s not a real one) will boost Chinese shares – which are cheap even after the sharp rebound since December. And as we explained recently, they’re likely headed higher.
Publisher, Stansberry Pacific Research
P.S. The U.S.-China trade war may have pushed Asian stocks down for a while, but it hasn’t slowed down the US$26 trillion infrastructure boom taking place in Asia right now. And my colleague, Brian Tycangco has found three ways to play this trend – and potentially make hundreds of percent gains. You can get all the details right here.