One of the biggest risks to the global economy is the possibility of an all-out trade war between the U.S. and China.
U.S. President Donald Trump has been demanding that China make trade concessions to cut the U.S. trade deficit with them by $200 billion – more than half the current annual trade deficit of $375 billion. (A trade deficit is the amount by which the value of a country’s imports exceeds its exports… the common perception is that they’re bad, but the reality – as with a lot of things – is a lot more nuanced.)
And over the weekend, U.S. Treasury Secretary Steve Mnuchin and China Vice-Premier Liu He came to a “consensus” about trimming the U.S. trade deficit with China.
Markets will likely cheer this on Monday. But as we’ve written before… it’s not over. The reality is that China – not a country to act counter to its own best interests – hasn’t made any meaningful concessions.
You don’t just pull $200 billion out of a hat
Since becoming U.S. president, Donald Trump has strong-armed – and cajoled – others to come to the negotiating table.
At the onset of his term, he threatened to slap 40 percent tariffs on U.S. manufacturers who wanted to keep their factories in Mexico.
So a number of companies, including Ford and Chrysler, revisited their cross-border expansion plans and instead opted to increase jobs in Michigan.
He later threatened North Korea’s Kim Jong-Un… and now, talks between Trump and Kim Jong-Un about the denuclearisation of the Korean peninsula are set to happen on June 12 in Singapore.
He’s also made good on promises to pull out of existing deals that his administration viewed as detrimental to the U.S. economy and national security. He pulled the U.S. out of the Trans-Pacific Partnership, a 12-country deal that would encompass around 40 percent of total global output.
And after more than a year of threatening to withdraw from the Iran nuclear deal if it was not renegotiated, he scuttled it last week.
But China is an 800-pound gorilla that’s the world’s rising – soon to be pre-eminent – superpower. With a $14 trillion economy and a population four times the size that of the U.S., China is not going to be pushed around.
China is also the United States’ largest single creditor, holding $1.19 trillion of U.S. treasuries. And China has actually been increasing its holdings recently – up by $100 billion over the last 12 months.
Expecting China to immediately reduce exports to, and increase imports from, the U.S. by a figure that’s as big as the economy of Greece is like hoping that an 800-pound gorilla is going to shave off its hair and put on a tutu… just because you ask it to.
It’s not going to happen.
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China will reduce its surplus with the US at its own pace
One of the key takeaways from the trade talks over the weekend in Washington was that China agreed to significantly increase purchases of U.S.-made goods – goods that will support the development of its own growing economy.
In particular, Vice-Premier Liu He agreed to increase imports of U.S. agriculture and energy products.
Interestingly enough, these are two segments where China is already a major net importer – and where it will undoubtedly continue to be for decades to come.
According to the U.S. Department of Agriculture, China is set to import a record 103 million tonnes of soybeans this calendar year, up 6.1 percent.
Soybeans account for the vast majority (90 percent) of U.S. agriculture exports to China, worth $12.4 billion a year. Even if China increased its imports of US soybeans by 10 percent, it would only make a $1.2 billion dent in the $375 billion-a-year deficit.
In energy, China has already been making a lot of U.S. oil and gas companies very happy. Imports of crude oil and petroleum products from the U.S. into China grew by 120 percent year-on-year in February.
So in reality, China had already been doing what it just said it told the U.S. over the weekend that it would do to help reduce the trade deficit.
That suggests that the trade deficit isn’t going to shrink the way Trump wants it to.
We should be prepared for more trade war rhetoric from both sides once Vice-Premier Liu He returns home to China from his trip to his nation’s biggest debtor. And that is virtually assured to result in more volatility in the markets.
Make sure you’re protected
So just because markets might exhale in relief, it’s no reason to think that things are all OK.
We’ve been suggesting that you take some simple steps to take to prepare for a crisis – such as a meltdown of US-China trade relations. For starters…
Don’t borrow too much to invest. Investing with borrowed money will make big losses even worse.
Hedge. Understand correlation in your portfolio. Try to have some holdings with prices that usually move in opposite directions.
Prepare for opportunity. Keep some cash on hand so you’ll be ready to invest at cheap prices when everyone else is running away. If you’ve been expecting the unexpected, you’ll be prepared to take advantage.
Editor, Stansberry Churchouse Research
P.S. And there’s also a great way to profit from the possible outbreak of a trade war… see our presentation here about an asset that could rally sharply if, and when, things heat up.