As the G-20 summit approaches, many are hopeful that a scheduled meeting between the leaders of the USA and China will result in at least a temporary truce in the evolving trade war. Our take on this is that there are long-term, core issues that the USA needs to have addressed and which China does not want to talk about. So, the question for investors is, what investments will prosper when the trade war is resolved for good or for ill? But, first here is a bit of background on the trade war.
Possible Truce in Trade War?
The New York Times writes about the possibility of a China trade truce.
President Trump is projecting a steely facade as he prepares for a critical meeting on trade this weekend with President Xi Jinping of China. But behind his tough talk and threats of higher tariffs is a creeping anxiety about the costs of a prolonged trade war on the financial markets and the broader economy.
That could set the stage for a truce between the United States and China, several American officials said, in the form of an agreement that would delay new tariffs for several months while the world’s two largest economies try to work out the issues dividing them.
While a short-term truce might happen in order for talks to go on between the two nations, there are core issues that need to be resolved before the USA makes a new set of agreements.
Such an outcome is not certain. Administration officials have expressed deep disappointment with China’s response to Mr. Trump’s pressure so far, characterizing it as a list of proposals, transmitted in Chinese, which they say would do little to curb China’s theft of American technology or address its other predatory trade practices.
Can China Make the Changes Necessary to End the Trade War?
Our sister site, Forex Conspiracy Report, asks, Can China Make the Changes Necessary to End the Trade War?
The bottom line with China is that the folks who control the Communist Party intend to stay in control. Every time there is a choice between more economic, social and political freedom and a threat to Party authority, the Party wins. The problem for China is that it has become too successful and over-leveraged in its ambitions. The country has a huge and growing debt load and many wealth Chinese are taking money out of the country.
For the trade war to come to an amicable end, China needs to let foreign firms compete on her own soil and its needs to let companies in its manufacturing sector rise or fall on their own merit. And, avoid antagonizing even more of the rest of the world.
Can China make the changes necessary to end the trade war? The issue is not China making those decisions but an increasingly centralized Chinese hierarchy digging in to protect their control and virtual ownership of China.
With view of an intractable trade war in mind, what will the resolution look like and what investments will prosper when the trade war is resolved?
How Many Jobs Has Apple Created in China?
More than a year ago 24/7 Wall Street reported that Apple supports 4.8 million jobs in China. This is twice the number of jobs it supports in the USA.
Apple Inc. (NASDAQ: AAPL) announced Friday morning that it will invest more than 3.5 billion yuan (about $506 million) to establish research and development centers in Shanghai and Suzhou, China. But the most interesting bit in the announcement comes in the boilerplate at the end of the press release: “Apple has created and supported 4.8 million jobs in China” (thanks to Google Translate). That’s about 2.5 times the number of jobs the company claims to have created and supported in the United States.
The article goes on to note that the majority of these jobs are through the Taiwanese company, Foxconn, which assembles iPhones in mainland China.
This is a core issue in the trade war between the USA and China. Foxconn adds $10 to the cost of an iPhone by assembling in China. They have discussed opening a US facility but that would add $40 to the cost of an iPhone. Now Trump has suggested a 10% tariff on iPhones assembled in China and Apple’s stock has gone down.
Can US Companies Export Jobs but Not Technology?
Well over a million US manufacturing jobs have disappeared since China entered the World Trade Organization and greatly increased it exports. This does not count many other related jobs that are not directly in the manufacturing sector but in supporting industries. The basic argument is that if and when a company can produce products more efficiently and cheaper in the USA than in China, they will, and the balance of trade between the USA and China will improve. But a deeper problem is that US tech companies operating in China typically need to have Chinese partners and these partners are prone to steal US technology and then turn around and compete with the US “partners.” This is an even greater core issue going forward. In all likelihood China will never quit stealing intellectual property when given the chance.
Thus, any resolution of the trade war will likely not be totally pleasing to either side and perhaps the “resolution” may turn out to be a long term change in the trade relationships between China and the USA as well as between China and the rest of the world.
What Investments Will Prosper when the Trade War Is Resolved (for good or for ill)?
For the time being the US tech darlings, the FAANG stocks are questionable because their steady earnings growth may be about to reverse. Investments that will not lose money are high quality bonds and US treasuries. And, consumer stocks that have prospered through good times and bad include Coca Cola, Procter and Gamble, and Johnson & Johnson. It is worthwhile to note and Johnson and Johnson and Microsoft are the only two US companies whose bonds are rated AAA.
Until the picture becomes clearer in regard to the trade war, US value stocks in the consumer niche may well be the best bet as US tech stocks may not have seen the end of the pain of an economic downturn caused by the trade war, not to mention tariffs and sanctions.