From the Desk of Garrett R. D’Alessandro, CFA, CAIA, AIF®
We cannot recall a time in the four decades since the normalization of relations between the U.S. and China when the two superpowers were so antagonistic.
Trade War, Cyber War, Industrial Policy War...
…All with China. We cannot recall a time in the four decades since the normalization of relations between the U.S. and China when the two superpowers were so antagonistic. The forces driving the current three wars have been fomenting for years. Trade tariffs are unlikely to resolve what is really an ideological difference between the two superpowers. China’s desire to become a technological and industrial hegemon, as expressed in their “Made in China 2025” policy, is surely their right. But the methods they are using in attempting to achieve hegemon status have generated most of the issues driving the U.S. and China apart.
Acquiring the status of global technology and industrial leader requires that China take its collective business and technology intelligence to a much higher level. China is pursuing that goal with highly aggressive sovereign behaviors that are at odds with Western moral, ethical, and business principles. While the U.S. cannot dictate another country’s actions, we have no choice but to combat China when its behaviors on trade, cyber-attacks, and industrial espionage violate agreed-upon fair trade rules.
Tariffs are only one approach, and not a terribly effective one. They will hurt consumers, harm businesses, and not achieve substantive change in Chinese behaviors where we think it really matters. A more comprehensive effort at the policy level is needed. Significantly reducing business by and between the U.S. and China is not the answer.
We think unfair trade is a justifiable battle, but the U.S. should tackle more than the trade deficit with China. We would also like to see efforts to stop the theft of intellectual property. Technological and industrial competition will define which country enjoys the best of the next few decades’ economic growth. The behaviors of the two superpowers are not aligned, and this is an issue that cannot be ignored.
We expect that the trade war will impact U.S. GDP growth by causing consumer goods prices to rise and companies’ export revenues to decline. The full impact in 2019 is projected to be about 0.6% of total GDP. This is not insignificant, but not so consequential as to cause a premature end to the economic expansion.
Our research team has already done some portfolio repositioning to reflect adverse earnings consequences on companies impacted by the trade war. Our asset allocation committee is taking the economic impacts of the trade war fully into account when setting our tactical asset allocation. These impacts will be noticeable, but at this time we still believe the U.S. economy will continue to expand well into 2019.