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John Kinsellagh
John Kinsellagh
Articles (158) 

US-China Trade Dispute: Investors Keep Wishing on a Star

There has been no factual basis for the long-held expectation the two countries will ultimately reach an accord

July 12, 2019

For almost 18 months, market valuations, in part, have been based on the somewhat tenuous, but nonetheless universally held, assumption that, despite their differences, China and the U.S. would reach an accord on a trade deal due to mutual economic self-interest. Financial journalists, especially subscribed to this belief, espoused the conventional wisdom that held, since there was too much at stake for both parties, the blustering and posturing would end eventually and a deal would ultimately be consummated.

The underlying risk for the market is that analysts and investors have been singing the same old song for the past 18 months, yet no agreement appears in sight.

Investors seem to have been operating under the delusion the only sticking point in the ongoing trade dispute was to iron out some small differences, or for the other party to end its hardball negotiating tactics. What was unimaginable was that the status quo, which had defined the trade relationship between the parties for the past 30 years, would forever remain unchanged.

For example, a May 9 article in the Wall Street Journal said that, “The sudden deterioration of trade talks between the U.S. and China this week has raised the prospect of a once-unimaginable rupture between the world’s two largest economies.”

First, what is the factual basis for analysts and financial journalists’ contention that a rupture between China and the U.S. is “unimaginable?” China conducts cyberattacks against U.S. defense contractors, hacks into the databases of private corporations, steals our trade secrets, conducts brazen espionage and has successfully recruited employees of defense contractors to spy and disclose confidential military secrets.

Why would this prolonged perfidy by China continue to be advantageous to the U.S.? All of this activity is not “alleged,” as erroneously and frequented reported by journalists, it is well-documented and real. For those who have been paying attention to the overall aspects of the relationship, the rupture wasn’t unimaginable, it was predictable.

One wonders if analysts and sophisticated investors have taken the time to read about China’s last-minute reneging on previous commitments they made related to terms and conditions concerning trade secret theft and forced technology transfer, which the U.S. had said were non-negotiable. The Chinese government now feels that accepting these terms, to which it had previously agreed, would make it lose face by the perception it was being humbled before the Americans.

Based on the failure of President Donald Trump and Chinese President Xi Jinping to reach an accord during their most recent meeting, it is now clear the market’s outlook on the trade issue has been based on the wholly unfounded presumption that President Trump would bend to pressure from the business community and try to make a deal with Xi.

What investors and analysts fail to realize and factor into their sanguine prognostications is there are now structural considerations surrounding that dispute that are wholly unrelated to investors’ wishes for prolonging a 10-year bull market, nor the wishes of American corporations to continue doing business in China.

President Trump, for national security reasons, not foreseen nor appreciated by Wall Street analysts, will remain imperturbable by insisting on Chinese agreement to conditions the U.S. has stated are non-negotiable. Have any analysts considered what happens if tensions between the two countries in the South China Sea escalate? Has anyone on Wall Street heard of the Spratley Islands?

Thirty years ago, an underlying foreign policy assumption, or basis for the initial contours of a U.S.-China trading relationship, was that once China shed the ideological trappings of Chairman Mao and communism and slowly evolved into a capitalist economy, it would shed the top-down, illiberal regimen of communist party orthodoxy and embrace Western freedoms and values.

In light of China’s continuing military buildup, its embrace of state-run capitalism and its quest for economic supremacy, this assumption has now been acknowledged by foreign policy experts to have been a strategic and geopolitical error of colossal proportions. This reality has made continuation of the present economic relationship between the two parties no longer politically or militarily viable.

Although prospects for an accord now seem to be diminishing, no one knows for certain the outcome for a trade agreement between the U.S. and China. Kipling’s famous aphorism comes to mind: “East is East, and West is West. And, never the twain shall meet.”

Intelligent investors should plan accordingly.

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About the author:

John Kinsellagh
John Kinsellagh is a freelance writer, former financial adviser and attorney specializing in civil litigation and securities law. He completed the Boston Security Analysts Society course on investment analysis and portfolio management.

He has served as an arbitrator for FINRA for over 25 years resolving disputes within the financial services industry. He writes primarily on financial markets, legal and regulatory issues that impact the investment community, and personal finance.

He is the author of "The Mainstream Media Democratic Party Complex" and "Election 2016," both available on Amazon. Follow him on Twitter @jkinsellagh.

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