Quarterly Update

Jan. 2020

Garrett R. D'Alessandro, Chief Executive Officer | Jan. 2020

U.S.-China Trade Truce: The Irony

As it pertains to our primary investment objectives, we now consider this trade conflict to be an enduring fundamental factor, just as we consider GDP, interest rates, company earnings, and market valuations, giving geopolitics an important weight in our strategic asset allocation decision making.

The U.S. declared a temporary trade truce with China, forestalling further trade tariff hikes on Chinese imports. Our take is that this action was consistent with the desire to limit the negative impacts of prior tariffs, which caused prices on imported goods to increase. In an election year, the potential impact on consumers was likely a consideration. As the time neared for the latest tariff increases, the U.S. prioritized economics over geopolitical goals.

We make no forecast as to the sustainability of such a truce. This is more likely a lull in the action relative to the long-range geopolitical struggle to counter the rise of Chinese global power and influence. As it pertains to our primary investment objectives, we now consider this trade conflict to be an enduring fundamental factor, just as we consider GDP, interest rates, company earnings, and market valuations, giving geopolitics an important weight in our strategic asset allocation decision making.

To that end, we believe the ascent of China has been undeterred by the tariffs. While China more heavily relies on exports to drive its economy, it is our view that geopolitics are the dominant force driving its trade policy decisions, whereas economics are the dominant factor driving the U.S. China remains determined to move up the value spectrum, away from being heavily reliant on manufacturing and toward becoming stronger in areas like applied research and development (e.g. artificial intelligence, robotics, and biotechnology). The long struggle ahead, between the U.S. seeking to remain the most dominant economic and global influencer and the rise of China, is in the early stages of a multi-decade geopolitical battle.

As the chart shows, the ascendancy of China since the 1980s has taken its status on National Capability and Geopolitical Power from fourth to an undisputed second. The U.S. views this as threatening its global superpower status. The current administration, unlike its predecessors that negotiated ostensibly weak structural trade deals with China, decided to take a confrontational approach. The problem is not the decision to confront an economic aggressor, but that the means and methods are unlikely to prove successful. Too many countries appear willing to pick up activity with China that the U.S. is forgoing. Meanwhile, the U.S. lacks the influence to force or facilitate an international coalition to collectively confront China’s aggressive economic tactics.

Our view is that the decline in the U.S.’s National Capability and Geopolitical Power ranking is a manifestation of decades of poor policymaking concerning free trade. The ruling economists of the day relied on rational economic theory and believed that globalization was good overall, so the U.S. should pursue such free trade practices. However, they failed to recognize that people and markets have behavioral characteristics and are strongly adaptive, not rational. The irony is that failed aspects of this free trade paradigm have led to a rise in both populist and socialist policies to counter the effects. Such policies, in our view, look wholly inadequate to address the fundamental issues of the U.S. economy sustaining our globally superior competitiveness. Instead, we believe a full-throttle pursuit of such populist and socialist policies will hasten the U.S.’s decline rather than lift us up in the decades ahead.

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As it pertains to our primary investment objectives, we now consider this trade conflict to be an enduring fundamental factor, just as we consider GDP, interest rates, company earnings, and market valuations, giving geopolitics an important weight in our strategic asset allocation decision making.

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