The U.S.-China trade war isn’t going to end anytime soon… for two reasons.
First… as I’ve said before, it suits both U.S. President Donald Trump and Chinese President Xi Jinping – and their political objectives – to be the big strong man with each other. Trump gets to be tough on China, which appeals to many of the Americans who voted for him. And Xi can show that he’s the boss by not backing down in the face of American threats.
But there will be a truce at some point soon.
Trump doesn’t want the trade war lingering into the U.S. presidential election season. American farmers, along with people who buy cheap stuff at Walmart, are slowly realising that it’s them – not China – who are paying higher prices. That won’t help Trump win states.
And even worse, according to the Council on Foreign Relations, the higher tariffs on Chinese goods are actually costing the U.S. government more than the increased revenues from the tariffs, in the form of trade relief payments to upset American farmers.
In China, American tariffs are hurting the Chinese economy at the margins, but it will get worse. And meanwhile, foreign (as well as Chinese) companies are moving production out of China. Because they’re wary of becoming collateral damage in the trade war, companies are increasingly looking at moving production facilities into markets like India, Vietnam and Bangladesh. That could hurt the Chinese economy a lot more in the long term than Trump’s tariffs.
That runs contrary to Trump’s claim that manufacturing jobs will move back to the U.S. And it lays the foundation for another future trade skirmish – this time with other low-cost manufacturing nations, because the U.S. trade deficit with China just got transferred to other countries.
So eventually the “trade war” will have to experience a truce. Markets might rally. Trump and Xi will take victory laps. Everyone (except for voters and farmers in the U.S and people in China) wins.
But a truce in the trade war won’t change anything.
The real war is coming
The second reason the trade war isn’t ending soon? It’s just a battle that’s part of a bigger war – one that isn’t ending for a very long time.
I think we’re about to see a multi-generational “war” between China and the U.S.
You see, a generation ago, China was a poor, developing country with lots of people. Today, China’s economy is the second-largest in the world, and it’s just a question of time before it overtakes the U.S.
China has been using its newfound wealth to extend its geopolitical influence to the far reaches of the earth. The biggest proof of this is Beijing’s historic Belt and Road Initiative (formerly called the One Belt One Road Initiative), where US$4 trillion is being spent connecting China to the rest of Asia, Africa and the Middle East via an intricate network of land, air and sea transport infrastructure.
This means dozens of Chinese state-owned companies, along with hundreds of billions of dollars in Chinese loans – and the influence these loans carry – are being mobilised to align these regions’ development pathway with that of China’s.
China’s military isn’t competitive with that of the U.S., but it’s getting there. Technological advances (in part thanks to technology transfers from the U.S. and elsewhere – and hefty subsidies from the Chinese government) have made China genuinely competitive in a range of sectors. China is big and strong, and it’s getting bigger and stronger – and it’s not content to play second fiddle to the U.S.
What does it all add up to? The U.S. and China are going to be competitors – economically, politically, geo-strategically, militarily, technologically, and in a lot of other ways – for decades to come.
So any kind of band-aid trade deal that Trump and Xi come up with might boost short-term stock market sentiment. It will give Xi some political breathing room, and it will boost Trump’s re-election chances. But a deal won’t change the underlying fierce competitive dynamic between the two countries.
Remember… China has been around for a lot longer than the U.S. – and knows how to play the long game (that is, it has patience) in a way that’s completely foreign to the American political (and economic) system. Americans think in terms of decades, and politics happen in chunks of four years (for the U.S. presidential cycle). In China, centuries are the currency of time… and leaders come and go when they please, rather than according to the calendar.
How to prepare for the real war
China will continue to grow fast… and there will continue to be lots of ways to invest in China to capitalise on that growth. But for a long time to come, there is going to be friction between the world’s two largest economies.
The dynamics will change when China becomes the world’s largest economy in the next 10-15 years. As the balance of economic power shifts, so will the terms of any negotiation in the trade war. What would have worked for the U.S. before (like tariffs, or banning Chinese tech companies) will not work when China’s global economic footprint eclipses that of the U.S.
For now… expect a trade truce in coming months. But don’t celebrate too much, because the war is coming. It still makes a lot of sense to invest in China… but with the looming war it’s all the more important to diversify – and don’t be afraid to hold lots of cash.
Publisher, Stansberry Pacific Research