Trade Wars Just Getting Started

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by Brian Maher

“The president has spoken… A China trade accord can jolly well wait until next year’s election is done, he announced yesterday. While the president spoke, the United States House of Representatives legislated… China is allegedly roughhousing its Uighur (wee-gr) Muslim minority. The House has passed legislation that denounces the inhumanity, and sanctions certain Chinese officials for their villainous participation.

Beijing is unamused – toweringly unamused. Swift retaliation it has promised if the Uighur Intervention and Global Humanitarian Unified Response Act of 2019 assumes force of law. In brief, neither party presently negotiates from goodwill.

Meantime, the Dec. 15 deadline draws near. On that date fresh tariffs enter effect – absent a resolution. Given the mutual asperity presently prevailing… a resolution is far from certain. Is it any wonder the stock market turned in losses three consecutive sessions? Thus today was the ideal occasion for a lovely trade rumor… a gorgeous sprig of catnip to excite, vivify and invigorate the animal spirits.

Global Times editor Hu Xijin, late yesterday: “I predict there is a high probability that President Trump or a senior U.S. official will openly say in a few hours that China-U.S. trade talks have made a big progress in order to pump up the U.S. stock markets. They’ve been doing this a lot.”

You may hand that man a Gurkha Royal Courtesan cigar. His forecast rang dead center… Word crossed the wires at 4:06 this morning, coming by way of Bloomberg: “The U.S. and China are moving closer to agreeing on the amount of tariffs that would be rolled back in a phase-one trade deal despite tensions over Hong Kong and Xinjiang, people familiar with the talks said. Recent U.S. legislation seeking to sanction Chinese officials over human rights issues in Hong Kong and Xinjiang is unlikely to impact the talks, one person familiar with Beijing’s thinking said.”

The rumor’s source requested anonymity. But the scalawags at Zero Hedge point a razzing finger at Mr. Larry Kudlow: “There were naturally questions about the Bloomberg piece: like why does an “unknown” source who “thinks” the deal is imminent take precedence, when very known people, i.e., the U.S. president and [senior trade official] Wilbur Ross, both said a deal may not happen for almost a year… or why was this “respected” Larry Kudlow source so terrified to give his name on the record if everything checks out?”

Mr. Kudlow is of course the president’s senior economic adviser – and professional optimist. We confess it: We trust the rumor no further than we could heave a horse by its tail. It claims, for example, “U.S. legislation seeking to sanction Chinese officials is unlikely to impact the talks.” But would you shake the hand of a man preparing to stab you with the other? And we might remind you: The Chinese are notoriously sensitive to slights.

But the computer algorithms running Wall Street are gullible dupes. They will fall for anything… Jilted 100 times by false promises, they salivated, swooned and fell for the 101st. It is time to buy, they concluded… and set to work. S&P futures jumped immediately on Bloomberg’s “news.” And the Dow Jones opened the day 200 points to the good. The president did his own part to meet Mr. Hu’s overnight prediction… and goose the stock market.

Trade talks were “going very well,” he claimed this morning – one day after suggesting a deal could go on ice until next year’s election is decided. The computers chose to believe this morning’s comments. The market leaked some steam towards the end of the day, it is true. But the Dow Jones still posted a 147-point gain. The S&P came out 19 points ahead; the Nasdaq, 46.

But we come now to this question: What happens to the stock market if Dec. 15 passes without a trade deal? Won’t the same computer algorithms that pushed stocks up today pull them down? We suspect strongly that they will. But by how much? Jim Rickards gives his answer below. He also shows you why deal or no deal, the trade war is “just getting started.” Read on.

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By Jim Rickards

“Markets are eagerly awaiting the conclusion of the so-called “phase one” trade deal between the U.S. 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 U.S. 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 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 wars. 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 U.S. approach recalls the Opium Wars (1839–1860) and the “Unequal Treaty” (1848–1950) whereby foreign powers (the U.K., the U.S., 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 U.S. 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 U.S. and China that more closely resembles a new Cold War. 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 Oct. 24, 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 U.S. and that business as usual will no longer protect U.S. national security.

Pictured above are Vice President Mike Pence (l.) and Secretary of State Mike Pompeo (r.). Pence and Pompeo have taken the lead in the public criticism of China by the Trump administration. In a series of speeches and interviews they have pointed out egregious human rights violations, blatant theft of intellectual property and threatening military advances that should cause the U.S. to treat China as more of a geopolitical adversary than a friendly trading partner.

The views of Pence and Pompeo, often captured under the heading of the Pence Doctrine, were neatly summarized by China expert Gordon G. Chang, author of “The Coming Collapse of China”, in a Wall Street Journal Op-Ed on Nov. 7, 2019, quoted below: “The Trump administration is heading for a fundamental break with the People’s Republic of China. The rupture, if it occurs, will upend almost a half century of Washington’s “engagement” policies. Twin speeches last month by Vice President Mike Pence and Secretary of State Mike Pompeo contained confrontational language rarely heard from senior American officials in public. “America will continue to seek a fundamental restructuring of our relationship with China,” the vice president said at a Wilson Center event on Oct. 24 as he detailed Chinaʼs disturbing behavior during the past year.”

Some argue the vice presidentʼs talk didnʼt differ substantively from his groundbreaking October 2018 speech, but these observers fail to see that in the face of Beijingʼs refusal to respond to American initiatives, Mr. Pence was patiently building the case for stern U.S. actions.

Moreover, the vice presidentʼs thematic repetition was itself important. It suggested that the administrationʼs approach, first broadly articulated in the December 2017 National Security Strategy, had hardened. That document ditched the long-used “friend” and “partner” labels. Instead it called China – and its de facto ally Russia – “revisionist powers” and “rivals.”

At a Hudson Institute dinner last Wednesday, Mr. Pompeo spoke even more candidly: “It is no longer realistic to ignore the fundamental differences between our two systems and the impact those systems have on American national security.” Chinaʼs ruling elite, he said, belong to “a Marxist-Leninist party focused on struggle and international domination.” We know of Chinese hostility to the U.S., Mr. Pompeo pointed out, by listening to “the words of their leaders.”

The U.S.-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 subsidizes agriculture. The U.S. subsidizes electric vehicles. China subsidizes a long list of national champions with government contracts, cheap loans and currency manipulation. Every major economy subsidizes one or more sectors using fiscal and monetary tools and tariffs and non-tariff barriers to trade.

Trump’s tariffs on China in January 2018 were reputedly the start of a trade war, but the war was actually begun 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 U.S. cannot accept Chinese assurances without verification that intrudes on Chinese sovereignty. China cannot agree to U.S. demands without impeding its theft of U.S. intellectual property. This theft is essential to escape the middle income trap that afflicts developing economies.

The EU is caught in the crossfire. The U.S. 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 favored interests. The U.S. will win the trade wars despite costs. China will lose the trade wars while maintaining advantages in intellectual property theft. Trade wars will continue for years, even decades, until China abandons communism or the U.S. concedes the high ground in global hegemony.

Neither is likely soon.”

- dailyreckoning.com