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Ray Dalio on the Likelihood of a US-China Trade War

Insights from Dalio

March 09, 2018 | About:

Ray Dalio (Trades, Portfolio) wrote a fabulous article called “A U.S.-China Trade War Would Be a Tragedy” a few days ago. The topic of tariffs and the possibility of a trade war have been the media headlines these days. As always, it’s great to hear from someone as reasonable and intelligent as Dalio sharing his thoughts on the subject.

As a side note, Dalio was in China recently and generously shared his thoughts and insights with the finance community in both Beijing and Shanghai. I watched the live stream of the Shanghai event and benefited tremendously from his presentation and the conversations he had with top Chinese financiers and leaders. It is with great pleasure that I find Dalio has shown a deep understanding of the Chinese way of doing things. In the aforementioned article, Dalio brought up this great point:

“The Chinese way of negotiating is more through harmony than through confrontation, until they are pushed to have a confrontation, at which time they become fierce enemies. They are more long-term and strategic than Americans, who are more short-term and confrontational, so how they approach their conflicts is different. The Chinese approach to conflict is more like playing Go without direct attack and the American approach is more like playing chess with direct attack. The Chinese prefer to negotiate by finding those things that the people they are negotiating with really want and that the Chinese are comfortable giving up, in exchange for those people they are negotiating with doing the same. Because there are now many such things that can be exchanged to help both parties (e.g., opening the financial sector in China, Chinese investment in the US, agricultural product imports to China, etc.), there is plenty of room for there to be big win-wins.”

The only thing I’ll add here is that the Chinese way of negotiating is partially applicable to other Eastern Asian countries as well, but China is probably the best representation of, well, the Chinese way. Based on the above reasoning, Dalio came to the following observation:

"For these reasons, it’s in the Trump administration’s interests to make clear what it wants most and, if they can’t do that, to not be aggressive until they figure out what beneficial exchanges are. Of course, trade is extremely complex because there are all sorts of interconnections globally, so being clear without adequate time and exchanges of thinking isn’t easy."

Dalio then shrewdly pointed out the political nature of the event:

"However, as important as the real trade issues is politics, which is especially important at this very political moment in both countries (i.e., ahead of “elections”). Politics can make politicians act tougher than they should be if they were operating solely in their country’s best interests because looking tough with a foreign enemy builds domestic support. Politically for Donald Trump, two of his three biggest strongman promises were 1) to build the wall with Mexico and 2) to reduce the trade deficit with China, by getting tough with them both. Xi Jinping has similarly made commitments to be strong in dealing with adversaries, including the US."

In the end, Dalio came to the following conclusion, which I agree with completely.

"For these reasons, it seems to me that good deals are to be had for both countries, while a trade war has the risk of tit-for-tat escalations that could have very harmful trade and capital flow implications for both countries and for the world. At the same time, I think and hope that both sides know this, and I believe that what is happening now is more for political show than for real threatening. The actual impacts of the tariffs that have been announced on the US-China trade balance will be very small. If tariffs are imposed as indicated, I would hope and expect the Chinese response to be small and symbolic so that both sides will have rattled their sabers without actually inflicting much harm. What will come after that will be more important. I wouldn’t expect it to amount to much anytime soon. If on the other hand we see an escalating series of tit for tats, then we should worry."

Wonderful but insightful short piece by Dalio. I hope you enjoyed as much as I did.

About the author:

A global value investor constantly seeking to acquire worldly wisdom. My investment philosophy has been inspired by Warren Buffett, Charlie Munger, Howard Marks, Chuck Akre, Li Lu, Zhang Lei and Peter Lynch.

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