From the onset of the Trump trade war we’ve argued that the broad-brush tariffs advocated by Peter Navarro were damaging and that a very targeted approach on security and intellectual property would have been better. Finally, the tariff fight with China is being defined over 5G, which is where critical agreements always needed to be forged.
Here is an interesting feature article from Reuters about 5G and security and a warning to the US from Australia: https://www.reuters.com/investigates/special-report/huawei-usa-campaign/ . My thanks to Erwan Mahe for bringing this reporting to my attention.
Targeted security and defense protectionism can be understood by Americans and investment market agents. Bludgeoning soybean farmers still makes no sense. Agricultural bankruptcy rates are climbing.
Raising sneakers prices for Americans doesn’t make us safer. Remember, tariffs are a sales tax on the American consumer. Trump knows it. The people around him know it.
So can they admit their error? Not likely. But a possible compromise is to be very heavy-handed on security issues and to rescind protectionist tariffs that punish Americans. Focus 100% on security tariffs. Use quotas. But be prepared for the countermeasures. Remember, the second word of the phrase trade war is war. We are now engaged in it.
Note the implications of the word war. The modern version of warfare plays out in the economic and sanctions realm. That is not an unreasonable alternative to the traditional version. However, history warns us about economic wars turning into shooting wars.
Moreover, we need to stay abreast of where future battlelines are forming, such as the struggle for access to rare earths. (See http://www.nationaldefensemagazine.org/articles/2019/3/21/viewpoint-china-solidifies-dominance-in-rare-earth-processing.) The Chinese are already acting strategically on this front and have decisively outmaneuvered the US.
Trump’s tactics require that military prowess be sharply honed by the USA. And funded fully by Congress. That readiness has now become necessary, whether we like it or not.
We have rebalanced our position in the defense sector and continue it as an overweight selection in our US stock market ETF portfolios.
David R. Kotok
Chairman and Chief Investment Officer
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