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Trade Negotiation Turmoil – Opportunity?

Date Posted: May 8, 2019

The Trump Tweet — Two Purposes
First Purpose
Last Sunday President Trump threatened new tariffs on Chinese imported goods reflecting concerns over backtracking by China in their trade negotiations. A Reuters’ report suggested that concern arose from a diplomatic cable received from China Friday evening. According to the Reuters report, the Chinese cable contained “systematic edits” to the nearly 150-page draft agreement.
Our past commentaries concluded that the agreement on a trade pact would come down to approval by just two people — the presidents of the United States and China. Our view continues that the self-interests of both would ultimately lead to agreement. In the case of President Trump, he needs to ensure a growing economy during his bid for re-election. For President Xi, he needs to ensure continued growth for the Chinese economy to support his policies to increase the position of the state-owned enterprises and most importantly to maintain political stability.
Second Purpose
President Trump’s announcement of higher tariffs serves a second purpose. He wanted to appear strong in dealing with China against his potential Democratic presidential candidates. Interestingly, Democratic Senate Minority leader Charles Schumer tweeted after the President the following as quoted by CNBC “hang tough on China, President. Don’t back down.” The Asia Times quoted one of the leading Democratic candidates, Senator Sanders as saying, “We need a president who will actually fight for American workers, keep their promises, and stand up to the giant corporations who close down plants to send jobs overseas.” At the same time, another leading Democratic presidential candidate, Joe Biden, downplayed the competitive threat from China. A recent The Hill article quoted Biden as saying, “But guess what, they’re not competition for us.” The President’s statement deals with the strong statement of one candidate and the weak statement of another.
Chinese Negotiator Continuing Trade Talks
Chinese Vice Premier Liu He will be coming to Washington on Thursday — a day later than originally scheduled. In our view, China’s decision to send its chief negotiator indicates a willingness to continue trade talks. This visit, we suspect, does not compare to when, on December 7, 1941, the Japanese ambassador to the United States delivered a memorandum to the U.S. Secretary of State – about the time Japan attacked Pearl Harbor — saying “it is impossible to reach an agreement through negotiations.”
Keeping Incentives for Meeting Trade Agreement Provisions Could Lead to Future Disagreements
Ensuring China carries out the trade agreement remains a key concern for U.S. negotiators. The U.S. seems to be demanding that certain tariffs remain in place for some time to ensure just that. Investors should keep in mind that the bilateral nature of the agreement could lead to the U.S. threatening to raise tariffs later if China violates parts of the agreement. This differs from a multilateral trade agreement in which a group of nations would bring such pressure.
Investment Conclusions
At the time of the then sharp market decline, our December 26th commentary suggested, “We respect the concerns showed by the major equity markets for a potential economic slowing in 2019 and a possible downturn in 2020. At the same time, such sharp equity market downturns can create investment opportunities for those investors with liquidity and both the risk tolerance and strong stomach to look over such periods. Perhaps Warren Buffet’s experience with his original investment in the textile company Berkshire Hathaway can prove helpful. The return on his original textile company investment proved modest. As a result, he shifted his investment approach according to The Economist from “buying fair companies at wonderful prices” to “buying “wonderful companies at fair prices.” Perhaps the current market weakness provides that opportunity.