When Saying and Doing Are the Same Thing in a Trade War
Investors continue to assume that what President Trump says and does on trade will be two different things. Actual events have proven otherwise, and global markets have not yet figured this out. We are on the verge of an upshift in geopolitical tension that will impact all markets.
Since my last post here, the trade war has heated up. Financial markets may finally be picking up on the true nature of the contest. Leading telecommunications firm Huawei is ground zero for the war. Since our last post, President Trump signed the “Executive Order on Securing the Information and Communications Technology and Services Supply Chain” which can be found here. Let’s break down the implications.
The Scope of the Order is Huuuuge!
What stands out in the Executive Order is how broad it is. The Commerce Department does have 150 days, until October 12, 2019, to issue “implementing regulations”, which typically will narrow and clarify the scope of the EO, including adding in criteria for exclusion from the prohibitions in the EO as well as mechanisms for negotiating specific issues. However, as written, the Order may provide for the wholesale regulation of technology products and services. Here is an incomplete list of parties whom the EO can prohibit and/or impede transactions with:
- Foreign companies designated as “foreign adversaries”
- Companies owned or controlled by persons or entities from countries deemed as “foreign adversaries”
- Subsidiaries of US companies located in a country designated as a “foreign adversary”
- Companies located in allied countries if their supply chain involved transactions with persons or companies from a “foreign adversary”
Strange Bedfellows
Big Tech is facing a real, and potential bipartisan call for regulation and antitrust, as I wrote here. Ironically, the specter of a trade war with China is becoming their best argument to not break up Big Tech. The argument rests on the notion that what is good for the likes of Google and Facebook is good for the American consumer and the country in general. Of note, many of these companies have extensive ties to China. This is a complex debate with arguments on both sides. For more on the topic, read this.
Time to Take Him Literally
Since 2015, political and economic observers have consistently ignored President’s Trump core positions and assumed that he would not act on them. Time and time again, this has been the wrong approach. We are seeing it on immigration, on regulations, on taxes, on NAFTA, on the role of NATO, and now on trade with China. Markets seem to jolt upward at every conciliatory tweet about China. There remains a sense of optimism that a trade deal will, of course, eventually happen. But there was no meeting between Presidents Trump and Xi in March and there is no trade deal. There are only tariffs and a lot of them. Investors need to come to grips that we are very much in the midst of a much wider clash of civilizations. The President, as well as his key advisors on trade, has been consistently protectionist in their rhetoric. As Forbes wrote presciently back in 2018 here, it’s “time to take him literally”
A more literal assessment of this administration’s intentions will force investors to reset near-term expectations for US economic growth and stock market performance. It likely will provide a new lens for the Federal Reserve to evaluate interest rate policy. And it will have reverberations across global stock, bond, and commodity markets, in particular, Chinese stocks and Crude Oil.
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Any opinions or forecasts contained herein reflect the personal and subjective judgments and assumptions of the author only. There can be no assurance that developments will transpire as forecasted and actual results will be different. The accuracy of data is not guaranteed but represents the author’s best judgment and can be derived from a variety of sources. The information is subject to change at any time without notice.