The Trump Card: How the US Could Win the Trade War

Trump has repeatedly said that China is not yet ready (nor willing) to trade on a level playing field.

Despite decades of unprecedented growth, the future is starting to appear more uncertain in China. Many are asking, is there a resolution in sight?

"And what does this mean for my China portfolio?"

One of our investment indicators—new capital flows into all sectors within Chinese equities—indicates that the issuance of new stocks are on track to be the lowest since 2013. See our chart below.

It's just one of the indicators we use to build our Asia-centric model portfolios, called Asia 360°. And our model has indicated that Chinese capital markets have been muted, allowing all asset classes to decline.

Banks have not been getting needed support from the People’s Bank of China, as reverse repo rates have been static since March 2018.

The reverse repo rate (and by extension repo rates) represents the rate at which the central bank of a nation borrows money from the commercial banks. This 'idleness' is an indicator of a lack of stimulus in the market.

But what does this mean for the US-China trade war?

With midterm elections in the United States now over, there are now only two guaranteed years left for the Trump administration. In the grand scheme of things, this is not a long time; a blip in the 242 years of U.S. history.

However, the Chinese have demonstrated a far-sighted knack for strategic planning, not minding fleeting opportunities and instead focusing on long-term objectives.

This has been enabled by the structure of their government and diligent adherence to its 5 year plans, and underpinned by a tenacious drive across its social, political and economic spectrum towards growth.

Because of this political and economic structure, China can sit back and observe how the U.S. domestic “civil war” unfurls, slowly building their soft power—creating and stealing technology and exerting their influence on Hollywood and media companies such as Facebook, Alphabet, and Apple. If done correctly, these efforts could influence the rhetoric—and key battleground issues—of the next election.

With this build of soft power, as well as the threat of other US–opposed nations, China (like other nations as well) can continue to influence US policy.

The US Fights Back

Donald Trump, Larry Kudlow and Peter Navarro present a conundrum to the authoritarian regime.

The United States is using protectionist measures, looking inward and protecting its self interest so as to blunt China’s power growth—particularly in areas within their sphere of influence such as the South China Sea.

And how does the US achieve this?

By increasing tariffs on Chinese-made goods. Right now, we see a tit-for-tat in terms of tariffs increasing.

The numbers do work in favor for the United States.

However, China has yet to strike back with tariffs on cornerstone US products, such as Apple phones. Another result of the tariffs is a dramatic decline in the RMB, which slightly offsets the impact of trade tariffs by making FDI and Chinese imports more attractive.

The Trump Card

The Trump administration does have one additional 'ace' up its sleeve in the game of global trade—a potential nail in the coffin for the massive trade deficit:

'Managed' trade.

Living here in Vietnam for over a decade, I’ve learned and experienced first-hand how developing nations demand imported products from around the globe, and it can be quite tough (and expensive) to get products cleared through customs.

It is quite a bureaucratic procedure, spanning several months with plenty of red tape and pitfalls.

The outcome? Many products and companies are not approved or even considered for import... And as a result the trade deficit gap can be maintained or minimized.

The End Game

How can the US apply this tactic to its benefit?

By simply halting or strongly restricting the importation of various Chinese products, as China has done to the United States in the past. This can also be done globally among the United States’ network of trade partners and allies, assuming mounting pressure from multiple angels, including both managed trade and strong tariffs.

While considered more of a “nuclear option,” a policy of restricted managed trade could potentially win the trade war for the U.S. We are seeing hints of this, as phone manufacturers Huawei and ZTE have been essentially banned from use by the U.S. administration.

However, there are immense risks with this strategy, as it could potentially unbalance delicate trade relationships and hurt U.S. domestic companies as well.

However, perhaps the US will not need to play this “Trump Card”, as recent developments suggest a potential transition in the conflict.

Trump’s assertion that China has agreed to reduce, and potentially remove, tariffs on US-made automobiles is a clear indicator of movement towards a resolution of the conflict. What’s more, the US and China have established a 90-day “ceasefire” of sorts, agreeing not to increase trade tariffs for 90 days.

Markets are already responding very positively to this news, and I believe it’s only a matter of time before we see more concessions being made. If not, then Trump has a card up his sleeve...

We’re keeping a close eye on the developments so you don’t have to, so stay tuned for more updates about the China–US trade war.

Peter Pham