He Said. Xi Said
Last weekend in Buenos Aires, The G-20 leaders held a scheduled meeting to discuss world economic and political concerns. One outcome of this vital meeting of global powerhouses was an agreement between U.S. and Chinese leadership regarding trade. Trade relations have played a central part in the market’s behavior this year. In fact some would describe the trade/tariff war as the single biggest influence in 2018. The hissy fit we are experiencing in global stock markets this week indicates it is still a central influence. Let’s examine this more carefully.
According to the Russia Times, at a press briefing today Chinese officials said:
“We are confident in reaching an agreement (with the US) within the next 90 days,” China's commerce ministry spokesman Gao Feng said in a weekly briefing on Thursday. The official added that both sides have been communicating and cooperating since the two countries’ leaders, US President Donald Trump and China’s Xi Jinping, met at the G20 summit in Buenos Aires.
Trump agreed to postpone further tariff hikes during talks between Washington and Beijing as part of the 90-days trade war ceasefire. The commerce ministry said that China will “immediately implement the consensus reached by the two sides on farm products, cars and energy.” American and Chinese officials are also planning to discuss intellectual property protection, technical cooperation, market access and their trade balance.”
As you may know, earlier this year President Trump argued that Chinese trade policy harms U.S. interests, slapping tariffs on Chinese imports and threatening additional tariffs. Let’s be honest, a tariff is the equivalent of a tax. The increased cost is passed on to consumers in one form or another. One example: tariffs were put on imported steel earlier this year. In reaction, U.S. producers raised prices for steel manufactured domestically and steel imports continued at approximately the same levels. A headline in today’s Wall Street Journal reads “Tariffs on Steel Hardly Dent Imports”. Steelmakers win, but U.S. manufacturers lose. The trade strategy being pursued by the U.S. Administration has not produced positive effects. Moreover, declaring yourself “a tariff man” is not comforting to the stock market.
President Xi has carefully responded to U.S. complaints. In Buenos Aires, he agreed to import more agricultural products. He wants cheaper food for the world’s largest population. Smart move. Yet Xi has not appeared to move on intellectual property protection and technology transfer. That’s when you allow a company like Apple to manufacture products in your country but require them to give the technology to the government. Take a guess at the long term impact of giving your proprietary knowledge to a foreign government known for illegally obtaining and producing copycat goods at lower prices. Xi is following a long term strategy of “slow-playing” the United States on trade matters.
Presidents Trump and Xi are men with vastly different backgrounds and objectives. Our President was fortunate to have attended fine schools and get a nine-figure grubstake from his father to start his real estate business after graduating from Wharton. On the other hand, Xi suffered from serious misfortune during his youth as his father was banished during Mao’s Cultural Revolution. Hard to believe but Xi lived in a cave at one point. Xi excelled however at organizing and motivating people to achieve his goals. I guess that is one thing these two gentlemen have in common.
In my opinion, trade has moved from one of the major issues to THE MAJOR ISSUE influencing the global economy. The markets seem to have acknowledged this week that while some aspects of trade disputes are easily fixable, there are some more complex issues that may be intractable. At the very least, improving trade policy will require long term negotiations. It won’t be solved over a weekend in Buenos Aires. And as much as it pains me to admit, we know that the market dislikes anything that requires patience. Challenging times. Be careful.
Reminder: these are my opinions. My blog = My opinion.
Ralph McDevitt
December 6, 2018
