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What If This Is China's Trade War Goal?

Written by Briton Ryle
Posted June 5, 2019

Are you sick of hearing about the trade war with China? Well, I wouldn't be surprised if you are. I'm kinda sick of writing about it (though it may be hard to tell because I do it so much).

At times I find myself even wishing that a watered-down deal would just get done so we could stop hearing about it and move on. After all, it's been a year and a half since the first tariffs on solar panels were announced. 

But doing a deal just to close this chapter and move on might be a really big mistake. Because what if China really just doesn't care? What if China's entire strategy is to delay and then delay some more while it moves closer every day to having an economy that can really stand on its own feet? 

And what's more, what if China's ultimate goals really are dynastic? 

I ask these questions because I recently came across an article by a University of Maryland professor, Peter Morici. I've been reading his stuff for years. He's typically pretty hawkish about things, but I found his perspective on trade with China to be worth a look. 

Here's an excerpt:

Americans should be prepared for Mr. Trump’s tariffs to become permanent and to disengage from China, find new markets for agricultural commodities and learn to make or purchase elsewhere those things we import from China.

At the center of the impasse is Beijing’s refusal to change its laws to lock in commitments to end forced technology transfers by foreign companies seeking access to Chinese markets, outright theft of American patents and trade secrets, subsidies for exports and industrial policies that target U.S. competitive advantages.

Commerce among members of the World Trade Organization is premised on the notion that trade should be based on comparative advantage to raise incomes and wages among all nations. It requires all nations — including China — to conform their domestic laws to lock in commitments to serve that principle.

China says it won’t change its laws as a matter of sovereignty and honor. Nonsense — we are engaged in these negotiations because it did not keep its word to change its laws and abide by commitments it made when it signed on to the WTO in 2001.

Leopards and Their Spots

That point about promises made when China joined the WTO is interesting, no? It's been almost 20 years since China joined the WTO. At the time it got several exemptions of standard practice because it was an economy emerging into the modern era. 

It probably did need some concessions. Maybe it still needs some.

Most people are generally trying to get along and participate with their fellow human. We tend to be optimistic and see the best in our fellow man.

We have words for people who don't care what other people think, who only care about how they can use and manipulate others for their own personal gain. Words like sociopath. 

One could certainly look at China in this light. 

The country hasn't really ever gone through the proper channels to get to the next step. China basically does what it wants. And the U.S. and others have consistently brought complaints about China to the WTO. 

And at some point, maybe we have to think that China's consistent resistance to playing by the rules is not just an accident or a series of mistakes. Maybe it's time to simply say China has no intention of ever playing by any rules but its own. Or as Morici says in this article, label China as a renegade state.

In President Xi’s mind, China is riding the great arch of history to a place where it makes the rules, and supplicants like the Europeans, Americans and Asian neighbors adhere to its vision. China — the all omniscient, omnipresent and omnipotent state — dominates, and the leader of the Chinese Communist Party sits atop a throne of empire.

China doesn’t play by the rules of other civilized nations — on trade, the sanctity of international waters or its obligation to restrain rogue states like North Korea. It’s time to label it for what it is — a renegade state.

China doesn’t send terrorists to explode our buildings but instead dispatches a host of reavers to steal our technology, jobs and prosperity and sap our strength to one day dictate the terms of our surrender.

Terms of Our WHAT?!?!

OK, that "terms of our surrender" thing is a bit overboard, if you ask me. But the potential for simply disengaging with China seems to be becoming an increasingly possible outcome. In fact, some companies already are moving operations out of China to avoid the tariff situation

The U.S. hasn't really gotten tough with China before now because we've had dollar signs in our eyes. How much added business any company can do with China has been part of the valuation model for 20 years. 

So here's my question. And obviously, nothing is written in stone. But what if the next financial crisis isn't some credit default swap over-leveraged blowup? What if the next financial crisis is starting right now: a permanent 25% revenue drop for Apple, Starbucks, Ford, Qualcomm, and so on down the line?

Maybe I worry too much. And I sure hope the China hawks like Morici are wrong and that China and the U.S. really can reach a meaningful deal here. But I'm starting to game plan for the worst just so I don't get caught off guard. 

One thing I can tell you: If this trade war really is going to ramp up, the U.S. needs to stop messing with the likes of Mexico and Australia. If we're really gonna go to trade war with China, we're gonna need our allies.

Until next time,

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Briton Ryle

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A 21-year veteran of the newsletter business, Briton Ryle is the editor of The Wealth Advisory income stock newsletter, with a focus on top-quality dividend growth stocks and REITs. Briton also manages the Real Income Trader advisory service, where his readers take regular cash payouts using a low-risk covered call option strategy. He also contributes a weekly column to the Wealth Daily e-letter. To learn more about Briton, click here.

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