Another Trade Investigation Bombards Investors
In light of all this week’s “Trump trade war” headlines, let’s review the U.S.-China trade news so that you can quickly grasp the facts of the situation. It’s also important to understand that as much as the media might try to portray announcements about trade problems as sudden, whimsical and dangerous, they are in fact long-studied, methodical, and inclusive of a huge variety of government, industry, academic and citizen input. But problems can be ugly, and fixing them can be uglier. Here goes …
On August 14, 2017, President Trump directed U.S. Trade Representative Robert Lighthizer to commence a Section 301 investigation into “China’s Laws, Policies, Practices, or Actions Related to Technology Transfer, Intellectual Property, and Innovation”. The investigation was authorized under the Trade Act of 1974. The results of the investigation are brief (approximately less than two pages). The resulting recommendation is that the U.S. impose tariffs against some Chinese goods in an attempt to remedy trade abuses (including cyber theft and foreign ownership restrictions) that have not been successfully resolved through normal diplomatic means. It should be noted that the U.S. is actively involved in negotiations with China on these and other trade issues, which could conceivably resolve some of the situations that were highlighted during the investigation.
Interested parties may also read this statement from the White House, which does a good job of outlining the trade problems in slightly more clear language. In addition, the statement itemizes a series of recent favorable decisions by the World Trade Organization in which the U.S. either challenged foreign countries’ trade abuses or was itself challenged by foreign countries, indicating that the U.S. has often been deemed righteous by a global body of governance in its outcry against trade problems.
The Section 301 investigation was conducted and supported by a wide variety of U.S. government and industry representatives, including U.S. Trade Representative (USTR) Lighthizer, Treasury Secretary Steven Mnuchin, Peter Navarro, director of the Office of Trade and Manufacturing Policy, Everett Eissenstat, deputy director of the National Economic Council, the USDA, Secretary of Agriculture Sonny Perdue, the Departments of Commerce and Defense, and the National Security Council.
On March 22, 2018, President Trump directed USTR Lighthizer to publish a list of Chinese goods, within 15 days, that could potentially be subject to tariffs. After publication of the list, a 60-day notice and comment period will commence. At the conclusion of that time period, the USTR will issue a final list of Chinese goods subject to tariffs.
The tariffs are expected to cover up to $60 billion of Chinese goods, targeting the country’s Made in China 2025 strategy, which involves the Chinese government’s financial sponsorship of domestic manufacturing. (For perspective, the U.S. has a $375 billion trade deficit with China.) Tariffs may be applied to products from the Made in China 2025 focus industries, including aerospace, automated machine tools and robotics, information communication technology, machinery, maritime and high-tech shipping, modern rail, new energy vehicle and equipment, power equipment, biopharma and medical products.
USTR Lighthizer spoke to the House Ways and Means Committee and the Senate Finance Committee this week regarding the tariff issue. He said that he is focused on minimizing the impact on U.S. consumers while maximizing pressure on Beijing to amend the chronic U.S.-China trade problems.
President Trump also directed Treasury Secretary Steven Mnuchin to make recommendations, within 60 days, on the findings of USTR’s Section 301 investigation. The recommendations are expected to be complementary to recommendations made by the Committee on Foreign Investment in the United States (CFIUS), and could include proposed restrictions on Chinese investment in sensitive U.S. technology.
In addition, the U.S. will address China’s discriminatory technology licensing practices through a World Trade Organization (WTO) dispute proceeding.
Various U.S. Senators from agricultural states, including Sen. Michael Bennet (D-CO) and Sen. Chuck Grassley (R-IA), were rightfully worried that China will retaliate against soybean farmers. USTR Lighthizer responded, “it’s not possible to take the position that because of soybean farmers we’re not going to stick up for our rights in a whole variety of ways and have hundreds of billions of dollars’ worth of exporters and domestic producers be punished because of unfair trade.”
On a side note, the Office of the U.S. Trade Representative is currently working on opening up additional markets for agricultural exports via new free trade agreements targeting at least one country each in Africa and Southeast Asia. USTR Lighthizer stated, “It’s going to be a focused negotiation where we get something very quickly for agriculture but also other parts of the U.S. economy and increase exports.”
As I mentioned recently in reference to the Section 232 investigation into the national security implications of trade abuses within the steel industry, when a country implements unfair trade practices, there will be industries that benefit and industries that are harmed. Later, when those trade abuses are remedied, the situation might be reversed, with some industries being harmed and others benefiting.
For an analogy, let’s say that my teenage daughter keeps stealing her pre-teen sister’s allowance, and using the money to buy lunch for her high school friends every Friday. Finally, my pre-teen daughter finds a way to successfully hide her allowance so that her teenage sister can no longer buy lunch for the high schoolers. As a result, the high school friends become quite angry that there is no more free lunch, and they stop associating with my teenage daughter. In turn, my teenage daughter gets quite angry and vocal about her diminished social status at school, causing a ruckus at home and blaming her pre-teen sister for her woes.
You will probably think to yourself, “Yes, the pre-teen daughter had every right to defend herself, and it’s the teenager’s own fault for stealing the money in the first place.” That is essentially what is taking place with U.S.-Chinese trade relations.
If the U.S. eventually imposes tariffs on Chinese goods in retaliation for cyber theft and other abuses, various people and entities will cry foul. It’s important to understand that fixing problems is almost always the right thing to do, and that many special interests will find ways to decry and distort the “trade war” in an attempt to use the heightened media attention to their own personal, business or political advantages.
The situation will continue to unfold. Our job as investors is to decide how to proceed with our investments, based upon the facts at hand.
HOW DOES A “TRADE WAR” AFFECT MY STOCKS?
U.S. stock markets continue to slowly work their way through the long overdue stock market correction. The trading patterns on the S&P 500 chart look fairly normal to me, with a big 10% downturn in late January and early February, followed by a slow recovery, interspersed with continued volatility. Yesterday’s downward volatility was definitely exacerbated by news of the “trade war”.
The next question in my mind is this: “Will the S&P 500 spike down to its February lows at 2,575, or will it head back to about 2,715, where it traded mere days ago?” Either move would be normal, although certainly a quick rebound to 2,715 would be far more bullish for our share prices.
There are no particular stocks that I recommend buying based on this week’s U.S.-China trade news, although I personally jumped all over yesterday’s low price on Commercial Metals (CMC). China announced that it intends to impose tariffs on steel and recycled aluminum, and prices of steel stocks fell in response. I don’t know how quickly steel prices will rebound … I only know that I got a bargain, and I’m willing to wait for capital gains.
All of the stocks in the Cabot Undervalued Stocks Advisor portfolios represent high quality companies, which is a major reason that I remain calm during periods of excess market volatility. Should you “buy low” right now? Yes, I think current share prices present an excellent buying opportunity, and I would not hesitate to invest in good companies today.