A “Phase One” trade deal may be coming, but it likely won’t do anything to address the major issues — here’s why this isn’t bad news for investors
We’re in the final throes of a very important deal, I guess you could say one of the most important deals in trade ever.
So said President Trump last week.
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Now, while we’ll cross fingers our leaders can reach such a deal, at this point, it’s a bit like “the boy who cried wolf.” We’ve been on the edge of alleged deals so many times now only to see them fall apart that one has to take any such claim with a grain of salt the size of a bowling ball.
But let’s back up a moment …
Even if a Phase One deal is signed, what exactly does that mean? What would be in this deal, and how much of a “win” might it for the U.S.?
Obviously, the Trump administration would have us believe such a deal would be an historic landslide victory for the U.S.
On that note, last week, Trump said “I’m holding (the trade deal) up because it’s got to be a good deal. We can’t make a deal that’s like, even. We have to make a deal where we do much better, because we have to catch up.”
On the other hand, some are questioning how good it actually would be. While Trump would claim a win, that’s to be expected given his need to posture for the 2020 election. But underneath the hype, how much benefit would it actually deliver to the U.S.?
Not much, according to Yale Professor, Stephen Roach, who calls a Phase One deal “hollow,” “flawed” and “ridiculous.”
From Roach:
It’s politically expedient, especially for the U.S. President who’s feeling a lot of political pressures for other reasons at home. But it’s very flawed …
But let’s step back from Phase One.
You see, whatever near-term agreement is hashed out will most likely be irrelevant in the big picture. That’s because the real issue isn’t even close to being addressed.
***What’s at the heart of the U.S./China trade war?
The kneejerk response is that it’s an effort to address a long-term trade deficit between the two countries, totally nearly $420 billion in 2018.
Now, sure, this is important. But this trade imbalance has existed for decades. Why is it such a big deal now?
It’s not. Something else is.
When you dig a bit deeper, it becomes apparent that the trade war has less to do with “settling the score” on trade imbalances of the past, and more to do with preventing China’s rise in the future.
However, Phase One … or Phases Two, Three, and Four may be able to do little to curb this.
***What do you know about “Made in China 2025”?
For readers who aren’t familiar, it’s a Beijing-sponsored campaign, launched in 2015, with the stated objective of enabling China to compete — and win — in the advanced manufacturing sector. Basically, think “cutting-edge technology.”
In short, China wants to grow up and become a global superpower.
To date, even though China has the world’s second largest economy, it’s still a developing nation. As such, its economy has largely focused on manufacturing and exporting basic consumer goods — clothes, shoes, and various electronics.
China wants more. It wants to mature beyond its developing nation status, growing into a (if not “the”) global superpower.
To do this, Beijing has identified “high-tech” as the catapult to get it there. And that’s the real issue …
Doing so would bring China into direction competition with the U.S.
Digging in just a bit deeper, Made in China 2025 focuses on 10 technologically important sectors: next-gen information technology (think 5G networks and cybersecurity); high-end robotics; aerospace; ocean engineering; advanced railway equipment; electric vehicles; power equipment; agricultural machinery; new materials; and finally, biomedicine.
If you’re a regular Digest reader, you probably recognize several “megatrends” in that list which we often highlight.
Our government doesn’t want to cede leadership in these technologies — as it shouldn’t. The countries that control these sectors will reap huge financial rewards — not to mention the impact that leadership will have on national security.
Given this, it sets up a dynamic in which the U.S. and China are basically the two biggest kids on the playground who eventually are headed for a fight.
***The real issue has nothing to do with soybeans
Phase One will likely see China agreeing to increase purchases of U.S. farm goods, like soybeans. There will also probably be commitments to refrain from currency manipulation and efforts to protect U.S. intellectual property.
Sure, this will probably mean some U.S. “wins.” For instance, if it helps our hurting farmers, then wonderful.
But the overwhelming odds are that three massive issues won’t be touched in any upcoming deal: one, Beijing’s subsidies to help grow its “2025” technologies; two Chinese protectionism strategies, which prevent U.S. companies from freely accessing the Chinese market; and three (from China’s perspective), whether or not the U.S. will allow Chinese technology companies to compete in U.S. markets (think Huawei).
These issues likely won’t be addressed because they’re at the very heart of the impasse:
China wants to become the global technology leader. Trump wants the U.S. to remain the global technology leader.
We can’t have both.
***So, what should we do about this?
It’s highly unlikely the Trump administration will be able to curb Beijing’s long-term plans.
For one, Trump has far more to lose than President Xi. Case in point, Trump has to get some sort of deal signed in order to score a win for next year’s election.
Meanwhile, last year, China’s National People’s Congress approved the removal of the two-term limit on the presidency. In other words, if he wants it, President Xi will remain China’s president for life.
Given this, all Xi has to do is wait Trump out … as well as whoever wins in November, whether that’s Trump or someone else.
And consider who Xi really is.
From the BBC:
But Mr. Xi, who would have been due to step down in 2023, defied the tradition of presenting a potential successor during October’s Communist Party Congress.
Instead, he consolidated his political power as the party voted to enshrine his name and political ideology in the party’s constitution — elevating his status to the level of its founder, Chairman Mao.
Do you think such a figure is going to abandon plans to turn China into a global superpower? Do you think he’ll let China lose out to the U.S.?
But here’s the silver lining …
***If Xi is dead-set on turning China into the world’s tech leader, as investors, we can ride those coattails
Take biotechs, one of the sectors identified as part of the Made in China 2025 campaign.
Here’s Matt McCall on the enormous investment opportunity there:
I am going to go as far as calling 2020 — The Year of Biotech … In a research report I recently sent my Early Stage Investor readers, I detailed how China’s biotech industry is set for not just 10X growth … not 20X growth … not even 50X growth … but at least 100X growth.
This is not from some analyst making a prediction. It is no less than the Chinese government itself propping up the country’s biotech industry and targeting unheard of growth — 116X to be exact.
Matt goes on to explain how one of his Chinese biotech picks, BeiGene, just sold a 20% share to U.S. giant, Amgen. The result?
Back to Matt:
… BeiGene’s stock is up 50% in just three weeks. It has now gained more than 70% from where I recommended it in Early Stage Investor.
As we wrap up, yes, a Phase One deal may be inked at some point in the near-term. But it will likely do nothing to impact Xi’s growth plans for China.
But rather than worry about that, let’s use it to our advantage.
I’ll give Matt the final word:
Every once in a while, an investment opportunity comes along that offers up so much upside — and so little downside — that you’d have to be crazy not to take advantage of it.
Chinese biotech is one of the best early stage investment opportunities you’ll ever see in your life.
Have a good evening,
Jeff Remsburg
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