Larry Berman: Is the U.S. fight with China a trade war or a Cold War?
China’s desire to be the number one economy in the world started long before U.S. President Donald Trump shook his finger at the world’s most populous nation. Trump is a master at many things, but one of his greatest skills is that he’s the best at fighting with people. By suggesting China lied to the world about COVID-19, the issue is now on the front-burner, where he has turned up the heat considerably. This is hard to walk back.
There is a not-so-perfect storm (in terms of its impact on the global economy) brewing. Trump is a master negotiator, or so he tells us. He delivered the best economy ever, or so he says. And the U.S. does the best, and the most, COVID-19 testing… More than anyone else combined, he says. Let’s not fact-check those.
He’s also a master at not accepting any personal responsibility. So it’s China’s fault for the rest of the campaign season. They lied to the world, he says. Here, I would have to agree. I’m not sure I can believe much of the data China reports. Yesterday, there was one new case of COVID-19 in all of China. In any case, I don’t want to go down that rabbit-hole too far.
My dislike of the President’s style of governance is well known. I’m a bit of a China bull from a value-investing standpoint—it’s fundamentally one of the cheapest markets in the world. So, as a relative-value-investor, it’s made sense.
I’m not so sure it will continue to make sense going forward. I’ve spent most of the past month trying to figure out what the world looks like in the post COVID-19 world. This hot-and-cold war with China is likely a game changer.
So the key question from an investment standpoint - because I believe this trade war is going to get both hot and cold – is: Does the West need China more than China needs the West? And is this the nail in the coffin for peak globalization in regards to supply chains?
Regardless of how the world progresses on a potential vaccine or treatment for COVID-19, the war against China is heating up again. The interesting thing is that the U.S. Democratic Party might be even more of a China hawk than Trump. The Democrats will likely just be statespeople about it. Costs will be rising once we get through the deflation hit from the COVID-19 demand shock. Supply curves will be stressed, and corporate profit margins will be squeezed. Of this we are certain. Simply, the bull market in globalization is over. Supply chains will be restructured in many industries. Donald Trump may get his walls after all.
The COVID-19 pandemic likely marked the start of a new cold war between China and the US. Prior to coronavirus, tensions between Washington and Beijing were rising.
Consider the following:
- China had challenged American power in the Pacific, by building a chain of military bases across the South China Sea.
- China’s Silk Road initiative is meant to compete with the U.S. for regional and then global dominance.
- Growth in China was slowing rapidly. Most of the expansion over the past decade was a massive credit expansion.
- The Chinese population will likely peak in the next few years.
- Chinese desires to exert authority over Taiwan and Hong Kong have been ongoing and are heating up too. Canada knows this well.
- In the U.S., the Trump administration had initiated a formal trade war throwing fuel on the simmering fire.
A May 4 Financial Times opinion column by Gideon Rachman stated the following:
“The White House is interested in trying to nullify the legal doctrine of ‘sovereign immunity,’ which protects China from being sued for damages in U.S. courts. China has also contributed mightily to the rise in tensions. A Chinese foreign ministry spokesman, Zhao Lijian, has floated the evidence-free idea that coronavirus might have originated in the U.S. Beijing has also responded with unreasonable aggression to calls for an international inquiry into what is now a global disaster... Chinese officials seem to be under instructions to try to extend their own censorship regime to the foreign media and even foreign governments, policing what can be said, and threatening retaliation against those who fail to comply.”
These geopolitical issues are not priced into a market that only sees fiscal and monetary largesse. We all know not to fight the U.S. Federal Reserve. I hate to perpetuate a “this time is different” narrative, but there are secular changes - measured in decades - that can reverse the immense pacifist bullishness of the Berlin Wall falling. I was fundamentally very bullish on global growth in the late 1980s. Sadly, the peace dividend may be over. I’m worried about too-easy money and negative-rate policies, too. More on that next week, in the meantime gold is a great hedge.