Trump Not a Chump

We have looked through the details of the Phase One trade deal and despite spending last year exasperated by the unwelcome uncertainty and volatility that trade ‘news’ and Trump’s delivery of it caused, the conclusion from reading the trade deal is that however badly/annoyingly Trump has handled the news flow (a more efficient President might have done the whole thing behind closed doors), if you focus on what he’s been trying to achieve and forget how he’s achieved it, it is very sensible stuff. In order to change a culture, the trade culture, a culture that has been set for decades if not centuries, you need a big bat. Trumps Bat has included everything from tariffs to a preparedness to break the world into two trading blocs, remember that ‘peak threat’ moment last year? Why? Because the Chinese have ritually abused US (all) companies trying to do business in China yet have, at the same time, enjoyed (perhaps been surprised by) their free access to Western markets. The US is doing no more than levelling the playing field. For instance - business practices that the Trump administration has criticised:

• Using health standards to block the import of a variety of American agricultural goods.
• Using licensing, inspection and registration rules as anti-competitive barriers to trade.
• Turning a blind eye to the theft and counterfeiting of US (all) intellectual property.
• Failing to protect in law confidential information considered to be trade secrets provided by US (all) companies looking to trade in China.
• Failing in law to legislate against “electronic intrusions” (hacking) of computer systems.
• Failing to protect US (all) patent owners from copycats – something that has caused tremendous damage to big pharmaceutical companies. No sooner do they get a licence to import to China than the Western market gets flooded with generic versions from China.
• Forcing the transfer of American technology to Chinese competitors. To do business in China, international companies have had to hand over technology and trade secrets to get licence approvals.
• Supporting and directing Chinese company acquisitions and investments of foreign technology in industries targeted by Chinese industrial plans – in particular the Made in China 2025 industrial plan.
• Blocking businesses in electronic payments, securities, fund management and insurance, companies like Visa, Mastercard and AMEX.
• Competitively devaluing the Chinese currency and offering no transparency on their interventions in foreign exchange markets.

You can see why, as a businessman, Trump has arrived as President and been appalled by the imbalance in the trade relationship and the inequalities experienced by US companies compared to the free rein of Chinese companies dealing in the US. A lot of Trump’s showmanship and grandstanding is clearly heartfelt. International companies have been getting a raw deal – they are competing with Chinese exports at home whilst at the same time being abused or blocked from dealing with the Chinese in China. The US has set out to level the playing field and Trump is the tip of the spear. When you read the deal, when you see what the US is doing for itself, the next question is “Who is at the tip of the spear for Australia?” and are Australian companies (and other international companies not in the US) now at a disadvantage compared to US competitors, because their Presidents (Prime Ministers) haven’t done a deal. Clearly the US hasn’t achieved everything they want yet. Clearly the playing field is not yet level. Clearly China is not a “free” market and clearly Chinese competitors continue to enjoy trade privileges in the West. In Australia - Chinese companies have bought Bellamys, the Western Australian Airport, the Port of Darwin, 9m hectares of Australian land, Kirin’s Australian Dairy business worth $600m and they are the largest foreign owner of Australian water, and they control 2.3% of Australia’s soil. Not sure how much of China Australia owns… There are other issues with the trade deal – how it will be enforced, whether it will work in practice, whether China will interpret it differently than the United States, how long the deal lasts, how it affects Chinese dealings with other countries, if at all. The bottom line is that this trade bust-up and patch up had to be done. When you see what’s being agreed and the inequities being addressed, you wonder how the US trade imbalance has been accepted and ignored by generations of US Presidents and their administrations. Trump has heralded the signing of the phase one agreement with Beijing as "the biggest deal there is anywhere in the world, by far". For once he might actually be telling the truth. Maybe we should cut him some slack, and maybe we should be asking why our own government, and the governments of other countries dealing with China, aren’t doing the same deal. We should also, from a stock market point of view, realise that free trade with China is a huge positive for Western financial (equity) markets, and if the culture change happens and is permanent maybe the equity market can step up and stay up led by companies that export and export to China. We should also realise that the trade issue is important, is not settled, is not in stone, can change and will inject volatility if it deteriorates. For now we should all get behind it. It is very good for share prices if it works.