Saturday, August 17, 2019

For All the Tea in China

Ask The CFP® Practitioner



“Who gets the bird, the hunter or the dog?”   

~ John L. Lewis


Question: Is there hope for a trade deal with China?

Submitted Photo

Answer: In the short-run, the threat of further tariffs has declined after the meeting of Chinese President Xi Jinping and President Trump at the Group of 20 (G20) summit in Japan. The two leaders agreed to three things; 1) to restart trade negotiations 2) for China to purchase a not yet determined amount of U.S. agricultural goods, and 3) for the U.S. to resume certain shipments to Huawei, a Chinese global provider of information, infrastructure and communications technology. These three items combined have led to short-term optimism regarding the trade deal.

Trade negotiations with China are largely focused on technology transfer requirements, intellectual property protection and market access. Intellectual property relates to elusive things such as intangible patents, trademarks, copyrights and trade-secrets. With the arrest of Chinese tech giant Huawei’s CEO in Canada last December, it’s inferred that these unquantifiable items may influence national security. This is because of the sensitive nature of Huawei’s advanced technology and products as it integrates with 5G mobile broadband race with new connectivity offering higher-speed networks and equipment.

Trade war and tariff driven disruption in telecom related supply chains could potentially hurt corporate earnings of the affected companies. The back-and-forth nature of negotiations between the U.S. and China may be about more than trade imbalances. There are concerns over military technology and in some respects, national security as it pertains to communications. A 2012 report by the Permanent Select Committee on Intelligence states that “U.S. government systems should not include Huawei or ZTE equipment. Similarly, government contractors, particularly those working on contracts for sensitive U.S. system, should exclude ZTE or Huawei equipment from their systems.” Meanwhile, Huawei’s CEO was accused of fraud and violation of U.S. sanctions for selling the company’s equipment to Iran.

The ownership of intellectual property is seen by some as a modern day Cold War. The globalization and trade talk scenario with China isn’t new. Ancient Chinese empires brought goods to Persia, Greece and Rome via The Silk Road during the Han dynasty in 114 BCE. Fast forward to the Revolutionary War when the U.S. left English rule and forfeited our only source of tea, switching suppliers and beginning a trading relationship with China. In present day, the discussions are over telecommunications and intellectual property.

Obviously, a compromise from both leaders is the desired result to benefit trade overall. If Trump goes ahead with a third round of tariffs on the remaining $300 billion of Chinese imports the damage could be felt more deeply than that of the first two rounds. The reason for this is that the administration started with products that would be relatively easier to replace. By the time of a possible third round, the pain will likely be greater as alternative supplies become harder to identify.

Made in China       

While China produced low-cost goods for the U.S. all was well. As the Chinese were able to compete at the higher and more competitive end of the economic supply chain, the impact was felt in new sectors. Trade wars typically slow down economic growth, as has occurred in China. Regression to the mean is a statistical law stating that data eventually even out, or otherwise stated, water seeks its own level. In this instance, the data is economic growth. If growth has been unusually high or low, over time it will return to norm or average level.

It’s difficult enough to negotiate international trade agreements without having to consider the special nuances of enterprises owned and controlled by the government. Chinese business is organized in the exactly the opposite manner as private industry. Therefore, to answer your question, negotiations will likely continue because it is advantageous for both countries to continue. Coming to a solution however that addresses the deeper issues will most likely require further dialogue and compromise. The importance of this outcome is critically important to future leadership. No matter what the outcome, supply chains and pricing will likely have to change.

Trade allows for the exchange of goods and services as well as customs and culture. Tariffs raise costs, disrupt supply chains, encourage retaliation, and create uncertainty. Economic vagueness, ambiguity and indecision can be the root cause of lower business investment until certainty returns. Tariffs on Chinese goods has the potential to weigh down our economy. Short-term optimism has been well-received by financial markets. The final outcome remains to be seen. Stay focused and invest accordingly.

Mention of specific companies’ names, information or any opinions expressed do not constitute a solicitation for the purchase or sale of any security referred to herein. The companies engaged in the communications and technology industries are subject to fierce competition and their products and services may be subject to rapid obsolescence.

Information contained in this report was received from sources believed to be reliable, but accuracy is not guaranteed. All investments contain risk, including loss of principal. Views are as of July 9, 2019 and subject to change based on market conditions and other factors “Certified Financial Planner Board of Standards Inc. owns the certification marks CFP®, CERTIFIED FINANCIAL PLANNER™, CFP® (with plaque design) and CFP® (with flame design) in the U.S., which it awards to individuals who successfully complete CFP Board’s initial and ongoing certification requirements.”

This article provided by Darcie Guerin, CFP®, Vice President, Investments & Branch Manager of Raymond James & Associates, Inc. Member New York Stock Exchange/SIPC 606 Bald Eagle Dr. Suite 401, Marco Island, FL 34145. She may be reached at 239-389-1041, email darcie.guerin@raymondjames.com. Website: www.raymondjames.com/Darcie.

Leave a Reply

Your email address will not be published. Required fields are marked *