Trade War between US and China
The trade war between the US and China has escalated in recent months with tit for tat moves on an almost daily basis from each country creating headlines and uncertainty when providing financial advice or making investment decisions. The uncertainly has led to share markets falling sharply on an almost daily basis and safe haven assets like bonds and gold have benefited.
A trade war is where countries raise barriers to trade with each other usually motivated by a desire to devalue a country’s currency and provide a more profitable outcome for companies that export goods. Trump is intent on fulfilling a presidential campaign commitment to ‘protect’ American workers from what he regards as China’s unfair trading practices.
For decades countries have been devaluing their currency to make their own products more competitive. But this is not a recent phenomenon, in fact China have been pegging the Yuan to the USD for decades.
When I studied Global Economics at Harvard (Boston, US) in 2011 our lecturer Niall Ferguson spend considerable time explaining the intricacies of how China have done this. My expertise is financial advice, but from memory they buy USD and then sell onto the People’s Bank of China to increase their foreign reserves. This in itself is inflationary so they stop this by issuing PBOC Bonds and then ‘sterilising’ the Yuan, that is, burning it. There is obviously a lot more complexity to it, but the main point is that it’s not just a 2019 phenome, it’s been happening for decades.
The trade war may stay with us for many decades. It is not something that can be solved instantly by a Trump tweet. For China the short term is at least 50 years. They see Trump as a one-term President and if he does a second term then they will only have to deal with him until 2024. China are patient, and have the time to wait it out.
The trade war is also not just about economics, it’s far bigger than that. It’s a battle between two great super powers, one who is the past and current World super power and one who may be the World’s future super power.
What does that mean for Australia? Well, we should continue to ride with both US and China, although both would like and are pressuring us to choose a side. According to Trading Economics, our exports are up 20% in last 12 months and reached an all-time high of AUD 42.38 billion in June 2019, so perhaps the trade war has helped our prosperity in the short term.
From a financial advice angle, the main point to realise is as I have said, the trade war is not new and the power struggle between the US and China will take decades to play out. Geopolitical issues have been with us forever. We’ll always have threats, but the share market always chugs along through all the noise and short term issues.