Today the Axioma Head of Applied Research for Asia Pacific Olivier d’ Assier issued a warning that a substantial risk which markets are ignoring is the potential for a trade war between the United States and China. He is astutely pointing out the economic and geopolitical fallout that could occur because of such a dispute between the world’s first and second largest economies. The consequences of such a trade conflict would be negative for U.S. and global stock markets.
This reminds you that your retirement portfolio needs an insurance policy to protect it from such uncontrollable geopolitical events. Gold outperforms in market crisis. Now is the time to learn what gold goes in an IRA along with the gold IRA rollover rules and regulations before such troubling situations arise.
Defense Department Report Changes Attitude Towards China Among Washington Lawmakers
For years, both Republican and Democratic Congressmen held an optimistic view that continued economic engagement with the Chinese would lead to them liberalizing their markets. Yet recently, the old Washington consensus that trading with China would encourage them to open up their markets has evaporated. Instead, both parties now favor using a stick approach instead of offering a carrot.
A defense department report released at the beginning of the year 2017 changed the minds of the Washington politicians. This 49 page report is entitled “China’s Technology Transfer Strategy: How Chinese Investments in Emerging Technology Enable a Strategic Competitor to Access the Crown Jewels of U.S. Innovation.” It claimed that Chinese investments within the United States would “directly enable key means of foreign military advantage.” This report created urgency for changing the government review process of foreign investments.
The report also made several powerful suggestions regarding the Chinese and their intentions. One of these was that a clash of civilizations could occur. Needless to say, it galvanized the lawmakers in Washington into altering their approach to China. President Trump has also advocated substantial changes to the way the trading rules should work between the U.S. and China.
Director for the Project on Chinese Business and Political Economy Scott Kennedy warned that:
“Washington has been struggling for a long time about what is the best way to get China to adapt and change… Trump is less risk averse than all of his predecessors. The logic of the president is that, ‘Yes, maybe you’ll lose some sliver of that current piece of cake that you have access to, but if you want to expand the size of the cake that you might potentially have access to China or elsewhere, then you have to be willing to put this current slice at risk’.”
It makes sense with this position having become mainstream consensus in Washington that a number of different measures to deal with China’s perceived unfair trade actions would be in the works.
U.S. Pursuing Several Strong Measures Against China
These days there are not one or only two U.S. measures being pursued against China, but more than three separate ones. The American legislators want to gain powers to more closely examine investment from China within the U.S. They are also looking into Chinese purchases of sensitive personal data. Besides this, the Trump administration has launched a number of investigations into potentially unfair Chinese trade practices.
Pending Legislation in Congress Will Discourage Chinese Acquisitions
There is already legislation working its way through Congress that will likely discourage future Chinese acquisitions. This Foreign Investment Risk Review Modernization Act is geared to impact China’s takeovers of American firms. It enjoys bipartisan Congressional support. The result of this legislation would be to increase the review procedures on foreign investment.
Currently this is handled by the CFIUS, or Committee on Foreign Investment in the U.S. This review process was intended to block any transfers of technologies that might have military applications. The end result of the changes would be to target Chinese takeovers.
Fears of Chinese Access to Data Holding Up Acquisitions
U.S. legislators are also looking for a way to hold up those transactions that might provide Chinese firms with access to huge personal identification pools of data. Third party observers and other analysts have expressed concern that this information might be used to blackmail military personnel and government officials.
A real world example of this worry is Money Gram. The federal government has been holding off on approving Chinese Ant Financial as they seek to acquire the American money transfer service in a $1.2 billion transaction. Ant began trying to get this approved in April. It is interesting to note that Chinese laws would not permit the takeover of Ant Financial by Money Gram if the situation were reversed.
Department of Commerce Also Running An Investigation
Back in March, the United States Department of Commerce launched its own investigation into an aspect of Chinese trade. This concerned aluminum and steel imports and the effect this could have regarding national security. These particular commodity imports are sourced primarily from China as compared to competing nations, as the graph shows:
Back in July, President Trump voiced his opinion on China regarding the investigations with:
“They’re dumping steel and destroying our steel industry. They’ve been doing it for decades, and I’m stopping it. It’ll stop… There are two ways: quotas and tariffs. Maybe I’ll do both.”
Unilateral American Trade Regulations Would Be the First Salvo in A Trade War
These investigations have the potential to lead to quotas or tariffs which the U.S. could be the first to impose. Tariffs would be intended to provide restitution to America for Chinese trade regulations against American firms. Less disruptive to trade would be a World Trade Organization case, as Director Anna Ashton of the U.S-China Business Council pointed out:
“The outstanding question is… if there are adverse findings, how our government handles these findings, whether they go forward with consultations to resolve the problem, or go with a dispute settlement in the WTO, or take unilateral actions like sanctions against China… Then we will be starting a trade war, perhaps.”
China Has Options to Retaliate
Naturally China can retaliate against any trade penalties from the U.S. Analysts believe they would deploy their trade weapons too. The Chinese could put up tariffs of their own. They might also use anti-corruption or monopoly laws to restrict American business activity in the Middle Kingdom. DLA Piper Lawyer Sherman Chu provides advice to Chinese companies which are U.S. government reviewed. He opined:
“Authorities in China have more discretion over how they go about interpreting the rules than they do in the U.S. There’s a risk of miscalculation resulting in a trade war.”
The problem comes back to the Defense department’s perceived “clash of civilizations.” Chinese Vice Minister He stated last week that:
“China wants to invest much more in the United States, but we’ve met quite strong political resistance. I can understand the strategic anxiety on the part of the US about China’s growth. We are ready to move from prosperity to become a powerful nation, one of the global powers.”
This is exactly what has U.S. officials concerned. It helps to explain how a trade war could accidentally develop between well meaning parties which are interested in protecting their own national best interests. Gold is your first and best historically proven line of defense against geopolitical instability such as international trade tensions. It is why you need to win over your financial adviser on gold in your portfolio, because gold offers insurance and protection during market turbulence. You should learn how to invest in gold now.