- The U.S.-China trade war has cast a black cloud over the U.S. economy and stock market for the last two years.
- Alexander Green explains why the Phase One deal reached yesterday means blue skies ahead for equity investors.
The U.S. stock market climbed to an all-time high Wednesday. It did again Thursday. Then it hit another record today.
We don’t have to wonder why.
The announcement of this week’s trade agreement with China is not just a big deal.
It’s the most significant economic accomplishment of the Trump administration to date.
Yes, deregulation was a plus. Corporate tax reform provided a boost as well.
But – let’s face it – if a Republican president can’t get a tax cut through a Republican House and a Republican Senate, he’s in the wrong business.
With China, President Trump took a huge political risk. And it paid off. Big time.
His critics argued for two years that his “trade war” would tank the U.S. economy.
They insisted that China – immune from the democratic pressures we have at home – would simply play the long game and wait him out.
It didn’t happen. Although there was certainly some pain along the way…
Trump knew that trade tensions would negatively affect the U.S. economy. (Economists estimate that it knocked approximately 0.5% off GDP growth each of the last two years.)
The conflict adversely impacted farmers.
And it hurt U.S. importers as well as exporters, who suffered from China’s retaliatory actions.
This is exactly why Trump’s predecessors – both Republican and Democrat – preferred to appease the Chinese government rather than confront it.
Here’s what this Phase One deal accomplishes:
- Beijing will ramp up purchases of U.S. goods and services by $200 billion over the next two years.
- The deal prevents and punishes forced technology transfers and the theft of trade secrets.
- It removes barriers that prevented U.S. banks from expanding into China’s financial markets.
- The two sides agreed to create a dispute resolution office to address complaints from U.S. businesses.
- China commits to not devaluating its currency to gain a competitive market advantage.
- It leaves in place U.S. tariffs on about $370 billion of Chinese goods – or about three-quarters of that nation’s imports to the U.S. – to incentivize a speedy resolution of Phase Two.
The business community is already celebrating, of course. And investors are throwing a party in the stock market.
Yet the national media – predictably – has acted like the skunk at the garden party.
The Washington Post, for example, posted this “news” headline: “Trump Touts ‘Momentous’ China Deal, But Trade Tensions Are Far From Solved.”
It offered this news “analysis” headline: “‘Phase One’ Is Signed: How Much Was Really Gained?”
The editorial board moaned that, “The deal leaves intact the foundations of Chinese mercantilism: a vast system of subsidies to favored high-tech industries and state-owned firms.”
(As if Trump should have also negotiated a new political and economic system for the world’s most populous nation.)
The Post‘s op-ed page piled on with “Two Years of Trade Wars and This Is What We Get?” from Catherine Rampell and “Why Trump Caved on China” by CNN’s Fareed Zakaria.
There was no mention that the president took a huge political risk for the benefit of the country and won.
Don’t get me wrong. I remain a critic of some of Trump’s economic policies.
I favor free trade over so-called “managed trade,” where the executive branch picks economic winners and losers.
The president is flat wrong to insist that the U.S. Treasury collected billions from the Chinese as a result of his tariffs. (U.S. businesses and consumers ate the costs.)
And he could do even more good if he concentrated on the budget deficit rather than the trade deficit.
But this week’s trade deal was a meaningful victory in an economic conflict that has been building for decades.
Trump correctly calculated that his tariffs would hurt China more than us. And he was right.
(China’s third quarter GDP growth was the weakest in three decades and – despite that country’s “official” numbers – was probably flat.)
Equity investors – whatever their political stripes – should open the good champagne tonight.
China will open its markets to U.S. goods and services, boosting agriculture, manufacturing, technology and financial services.
Closer economic ties also lessen our adversarial relationship with China. (At the signing ceremony, Vice Premier Liu He played up the need for both countries to tackle challenges like terrorism, aging and environmental protection.)
Best of all, the deal reduces the economic uncertainty that investors hate.
Trade tensions with China were a black cloud over the market. Now they’re gone.
And while stocks are bound to experience the occasional squall in the weeks ahead, investors are rightly seeing blue skies ahead right now.
Good investing,
Alex