In my article published on June 24, 2018, titled "Why America Wins The Trade War And How Clever Stock Traders Can Profit From It," I explained why China would inevitably capitulate to America in a trade war. I suggested that, sooner or later, China's leadership would begin to see that it holds a very poor hand of cards and would eventually give in to President Trump's demands. In the meantime, as the two sides continue to trade jabs and threats, markets should decline significantly, leading to buying opportunities. The Shanghai market has already dropped 20%. The same hasn't happened in New York, but American investors need only be patient.
Quoting a high-level policymaker in Beijing, the Wall Street Journal recently reported that "China’s offer to the world has been straightforward. Foreign companies are allowed to access China’s markets, but they would need to contribute something in return: their technology. As the practice increased, one U.S. administration after another, with only modest success, pressed Beijing to ease requirements that U.S. companies fork over technology. None of their efforts ever bore any fruit. The Trump administration says it wants to 'change the paradigm' by hitting Beijing with tariffs."
For years, American industry has been hollowed out because relatively cheap Chinese labor has made it virtually impossible for American companies to compete. The companies were able to compete with highly sophisticated products, but China's increasingly aggressive effort to force American companies to turn over technology is designed to allow Chinese competitors to take that market also. Coerced technology transfer is now a central part of the spiraling U.S.-China trade fight, a standoff that appears to be only more entrenched. The White House estimates China inflicts $50 billion yearly in damages on U.S. companies.
The Trump administration has finally tightening the screws on trade relations. In spite of the serious threat that US tariffs posed, China's leadership dismissed American resolve. It ought to be noted that China already imposes substantial tariff and non-tariff barriers on American goods. Yet, instead of backing down, China vowed to respond in a "tit for tat" manner. That was unrealistic because it is impossible. It will inevitably lose in a "tit for tat" trade war, in which it imposes tariffs on $130 billion in American exports, in retaliation for American tariffs on $500 billion worth of Chinese exports.
It was inevitable that the Chinese would feel the pain. China's Vice Commerce Minister, Wang Shouwen, said yesterday that the United States is a "trade bully." He further stated that it is impossible to engage in talks "when a knife is being held to your throat." Calling the USA a "bully" is interesting given that China recently threatened the Philippines with war if it dared enforce an international tribunal ruling that invalidating China's claim to the South China Sea. In keeping with China's bellicose rhetoric, Mr. Wang's comment was made in the context of renewed defiance of American demands. However, it is strong evidence that Beijing is beginning to wake up to the true state of its predicament.
China has finally realized it is impotent in the trade war with the USA. That is why its leaders now characterize American tariffs as a "knife at China's throat." Here's the bottom line: When a knife is being held at your throat, the person holding the knife is not in danger. A mere flick of the wrist can cut your jugular vein, causing uncontrollable bleeding and a quick death. Trump's tariff policy, then, is now viewed as posing an existential threat to China. Putting this into a Hong Kong movie context, even the best Kung Fu master will be hard-pressed to defeat an attacker who is in the process of holding the sharp edge of a knife against his throat.
The only way to avoid having one's throat cut is to capitulate. The fact that the Chinese now see things this way is strong evidence that Trump's tariff policy is working. The Chinese leadership is terribly frustrated and feels helpless in spite of the fact that it apparently feels compelled to continue making bellicose statements, at least for the time being. China now knows that its retaliatory tariffs will not help its cause. Since no one wants to bleed to death, least of all the very practical-minded Chinese, it is only a matter of time before the country capitulates to America's demands.
The main problem with the strategy outlined in June is that America's stock market has not dropped significantly. It may still happen. However, because American markets are so dramatically overvalued, and because the downward reaction to the trade war is so tepid and late, the risk now may outweigh the benefits. That's because other events, like Federal Reserve rate hikes, could dominate medium-term price movement. In the interest of asset preservation, even though the strategy might still work, at this point it is safer to watch the decline from the sidelines for quite some time. That's because we are approaching a point where the market could decline far more significantly and for many more reasons than simply trade war with China.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.