Payne's Perspective: May 13, 2019: It's War
After China returned a 150-page outline of previously agreed upon items with completely different terms, President Trump fired off several angry tweets. More than shots across the bow, these tweets were a declaration, and reminder, there was a new sheriff in town.
There is much speculation as to why Chinese officials tried such a last-minute underhanded move, including a hunch by the Wall Street Journal that China saw Trump’s tweets regarding the Federal Reserve as a sign of economic weakness.
I do not buy that, as I’m sure China understands how strong the U.S. economy is, just as U.S. officials understand how weak and vulnerable the Chinese economy has become. There could have been a guess that the White House was eager for a “win” heading into the election and would simply accept any changes in terms.
I think it was going to happen. as China took a shot and it backfired – big time.
How We Got Here
The developed world welcomed China into the World Trade Organization in December 2001 thinking it would make the nation become an honest player in global commerce. It would sell its products to the world, and in turn the world would sell its products into China. There were good reasons to think this would be a great deal, and China would be a great partner, including the fact the country had brought its average MFN (most favored nation) tariffs down to 15.9% from 42.1% in 1992.
China’s tariffs did come down, but they were still prohibitively difficult for nations looking to do business, especially when coupled with local regulations and corruption costs. Moreover, China’s MFN tariffs began to turn higher.
Grand Theft & Ambitions
Beyond unfair trade and subsidizing industries that crushed American manufacturers, China’s ambitions grew from regional powerhouse to global domination. These ambitions were outlined in the Made in China 2025 manifesto, and in real life with militarized manmade islands in disputed waters of the Pacific.
To get to the top perch in the world, China has been stealing technology, particularly from American business partners but also from universities and the U.S. government. The annual price tag for this theft is north of $200.0 billion annual.
The cost could be more if China can pinpoint American nuclear submarines with American technology.
Since China Joined WTO
2018 Top Imports
The Tariffs will sting Americans, but they won’t all be foisted on the American consumer. In fact, American businesses should feel patriotic pride in mitigating and taking some of the hit. While current and future tariffs will not derail our economy, there will be higher cost in certain areas.
Line in the Sand
President Trump drew a line in the sand for higher tariffs on more products.
There is a chance 25% tariffs could eventually be applied to all items China exports into the United States. In the last year, with existing tariffs in place, overall consumer inflation has been tame and even some heavily imported items like apparel have decreased in cost.
There is going to be a lot of chatter from economic experts attempting to scare the public into surrender, suggesting this is “free trade.” Well, all that cash leaving America barely comes back as China FDI, which was a paltry $39.5 billion in 2017, -2.3% from 2016, while the United States FDI in China clocked in at $107.6 billion.
I think there will be a resolution before more tariffs are applied and the market will rejoice; until then, know a lot of stocks are going on sale. This is what we love, right? Buy low!
There are lots of China-related names becoming very attractive, so make sure to form a list of these names that beyond near-term trade war issues have great businesses and have been executing. One name high on my list is Fortinet (FTNT), a leading cyber security stock.
The shares were on fire until the company posted results in April, which beat the street on revenue and earnings, but some had issues with EPS guidance:
It doesn’t think guidance justified the hit in the shares of the stock, which tumbled even harder after Citigroup put a “sell” rating on the stock.
I haven’t featured the stock as a Buy yet, but I know the name well, having put a Buy rating on the shares 11 times in the past eight years as low as $18.77 back in October 24, 2011.
I’d like to see the shares hold above $80.00, and I’m looking for signs of greater growth than suggested by company management.
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