The Art of (the Trade) War* – May 2019

By Teri | May 25, 2019

Once again, the trade war with China is dominating the news, and the financial markets.

We have seen stock prices drop. We have seen interest rates decline pushing up bond prices.

What we have not seen is a clear indication of the trade war coming to an end.

Because, what exactly, is the end? Or the “win”?

The US trades with 232 countries. With every country we either have a trade deficit or a trade surplus.

The US has had a trade deficit with China every year since 1985 [1]. We buy more stuff from China than they buy from us. Every year.

Is the “win” China agreeing to buy more stuff from us? I don’t think so.

When the U.S. declares tariffs on Chinese imports it means that the importer in the U.S. pays the tariff, not the Chinese.

Importers then pass on the higher costs to consumers if they can.

If the U.S. stops buying from China – it hurts Chinese exporters. That I think is the real objective.

When China declares tariffs on U.S. products going into China, it makes U.S. products more expensive for Chinese consumers. The result?

The Chinese stop buying from the U.S. – and it hurts U.S. exporters. Is this the objective?

Both countries look for other trading partners and trade shifts around the globe.

Within the last 2 years, eleven meetings with China have ended with no resolution and a ratcheting up of tariffs.[2]

I think the probability of a resolution is small.

As an investor, how do you figure out what to do?

I decided to consult an ancient Chinese military general named Sun Tzu.

Sun Tzu was a leader, strategist and philosopher during the 5^th century BC.

As a military leader he was faced with hand to hand combat and limited resources. For his soldiers it was always a life or death situation.

It isn’t quite the same as our trade war but there does seem to be a lot of sparing going on without either side having a clear advantage.

Fortunately, Sun Tzu recorded his strategies for winning a war in a book called “The Art of War.”

The current trade war with China reminded me of this book.

It reminded me of this book because if you engage in a war, by default you want to win. For Sun Tzu, there are many ways to win including outsmarting your enemy.

I find his insights as applicable today as they were 2400 years ago.

For our purposes, I believe there is predictive value in his teachings. The relationship of history, economics and investing all come into play during a trade war.

Sun Tzu said:
“To fight and conquer in all our battles is not supreme excellence: supreme excellence consists in breaking the enemy’s resistance without fighting.”

With no resolution in sight the financial markets are behaving like soldiers fleeing, not fighting to the death. Investors are selling equities as corporations grapple with the impact of tariffs.

If tariffs are passed on to consumers via higher prices, the risk is that consumers shift or stop spending.

Practically it is almost impossible in the U.S. to stop buying products from China.

I recently purchased an article of clothing from an online retailer. The retailer is Kastell Denmark, although the only link to Denmark is the owner’s Danish heritage.

Inside the clothing I discover that the designs are made in the U.S., but the shirt is made in China.

Out of curiosity I went back to the website to see if I could find anything that says the clothing is made in China. I could not.

I have a choice. I can send the shirt back or keep it. If I send it back it hurts the U.S. importer. If I keep it, I help Chinese exporters. Either way my one little piece of clothing is not going to become a flash point in a trade war.

I need to focus on the bigger picture. We don’t know how long the trade war will go on. We do know that the financial markets don’t like it.

I don’t believe there will be a resolution to the trade war anytime soon. Neither side is willing to compromise or back down.

As a result, stock prices could have a bumpy ride ahead. A decline in stock prices presents opportunities.

I recommend picking one stock you are interested in buying. Follow the price of the stock. Set a target price you are willing to pay. If the stock price comes close, buy a few shares.

^{Timeline of trade talks and tariffs:}

April 6-7, 2017: US and China agree to 100 Day Action Plan to resolve trade differences.
May 22, 2017: US and China agree to a trade deal.
May 3-7, 2018: US-China trade talks in Beijing. Talks end with no resolution.
May 20, 2018: US and China agree to put trade war on hold.
May 29, 2018: US reinstates tariff plans after brief truce.
June 4-5, 2018: Trade talks held in Beijing.
August 22-23, 2018 US and China meet in Washington DC. Discussions ends with no breakthroughs.
September 12, 2018: US invites China to reopen negotiations.
November 9^th US and China resume trade talks
December 2, US and China agree to temporary truce
January 7-9, 2019: US and China in trade talks in Beijing
January 22, 2019: US cancels preparatory talks with China
January 30-31, 2019: US and China trade talks in Washington DC
February 11-15: US and China hold trade talks in Beijing
February 21-24: US and China hold trade talks in Washington DC
March 28-29: US and China hold trade talks in Beijing
April 3-5: US and China hold trade talks in Washington
April 30 – May 1^st: US and China hold trade talks in Beijing
May 5, 2019: “US” threatens to raise tariffs on China
May 13, 2019: China announces tariff hikes on US products.

“China’s Ministry of Commerce warned that the dispute may even lead to the largest trade war in economic history”

* The Art of War by Sun Tzu
   https://suntzusaid.com

[1] www.census.gov/ft900
    U.S. International Trade in Goods and Services

[2] https://www.china-briefing.com/
    The U.S. China Trade War: A Timeline

From Wikipedia on “The Art of War”
“Many business books have applied the lessons taken from the book to office politics and corporate business strategy. Many Japanese companies make the book required reading for their key executives. The book is also popular among Western business circles citing its utilitarian value regarding management practices. Many entrepreneurs and corporate executives have turned to it for inspiration and advice on how to succeed in competitive business situations. The book has also been applied to the field of education.”^”

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